LONDON (Reuters) - China exported 380,000 tonnes of aluminum in semi-fabricated form in April.
It was the highest monthly total since November 2015 and brings the year-to-date tally to 1.33 million tonnes, up two percent on the same period of 2016.
That may not sound like a lot of extra metal.
But any increase risks fanning the flames of the trade tensions around China’s impact on the rest of the aluminum world.
The United States has taken the lead in pushing back against growing Chinese dominance.
The Obama administration initiated a formal complaint with the World Trade Organization and the successor Trump administration has followed up with a Section 232(b) investigation into the national security implications of global aluminum flows.
Moreover, there is plenty of devil in the detail of China’s aluminum exports.
Some sharp shifts in product mix are emerging which may mean a bigger impact on the global supply chain than suggested by the headline figures.
Graphic on China’s exports of aluminum “semis”:
Full breakdown of China’s aluminum trade:
Chinese policy makers are targeting their giant aluminum sector for supply-side reform this year.
A national audit will weed out those that have failed to tick all the legal boxes, while those in the region surrounding Beijing will be forced to cut production by at least 30 percent over the next winter heating season starting November.
Environmental urgency to tackle what is a massive user of coal-fired power is overlaid with diplomatic urgency to preempt a trade showdown.
Uncertainty over future production in China, which produces more than half the world’s aluminum, is the single most important reason why the London metal price is up 14.5 percent this year, outstripping all the other major industrial metals.
But all that lies ahead and right now, it seems, China’s aluminum production machine is cranking back up again.
By how much is a little difficult to say given the volatility in the monthly figures, which have implausibly shown annualized output gyrating in a three-million-tonne range over the last couple of months.
Cumulative output so far this year has risen by 12.5 percent to 11 million tonnes. Last year’s low base may serve to overstate that growth rate, but, on the other hand, there are plenty of analysts who think that the current figures are running too low anyway.
The best that can be said is that production is definitely trending higher. And so too are exports of semi-manufactured products (“semis”).
Graphic on China’s exports by major product code:
The superficially modest rise in exports so far this year is masking a dramatic change in the sort of product that is leaving the country.
Exports of bars, rods and profiles (international trade code 7604) have slumped by 34 percent, or 132,000 tonnes, in the first four months of the year.
Exports of plate, sheet and strip (code 7606), by contrast, have risen by 20 percent, or 105,000 tonnes. Those of foil are up by 14 percent, or 47,000 tonnes.
The latter may well reflect an acceleration in shipments ahead of a U.S. International Trade Commission anti-dumping finding, another salvo in the country’s trade barrage against China’s aluminum sector.
But why has there been such a sharp switch between Code 7604 and 7606, the two largest components of China’s “semis” exports in both 2015 and 2016?
The answer lies in part with one specific trade partner.
China’s exports of 7604 “semis” to Vietnam mushroomed from just over 6,000 tonnes in 2012 and 2013 to 463,000 tonnes in 2015 and 510,000 tonnes in 2016, according to International Trade Centre figures.
The material didn’t stay in Vietnam.
A significant part was found in Mexico last year, since when both media and market have been tracking its return to Vietnam. Google Earth, it seems, is now an essential part of every aluminum trader’s toolkit.
The market calls this moveable aluminum mountain “fake semis”, aluminum which has been transformed just enough to escape China’s export tax on unwrought metal and instead qualify for a VAT tax rebate.
The official jury is out, although Vietnamese officials are apparently curious as to why the obscure port of Vung Tao is now the world’s aluminum capital.
“Following instructions from Deputy Prime Minister Trinh Dinh Dung, officials from the trade, the finance and the planning and investment ministries will verify the origin and purpose of the aluminum stock,” reported the local “VN Express” newspaper on May 4, 2017.
From the depths of this murky story, however, shine a couple of clear statistical takeaways.
China’s total exports of “semis” were 4.2 and 4.0 million tonnes in 2015 and 2016 respectively.
It now seems a significant part of this, one million tonnes but maybe a lot more, never went anywhere near the global supply chain. It may have been on a world tour but it is still unconsumed.
Secondly, the sharp drop in Code 7604 exports this year suggests the first leg of that tour has been wound down.
It is also, though, masking the increase in other forms of product, particularly plate, sheet and strip.
This may be an ominous trend for producers in the rest of the world if, unlike the alleged “fake semis”, the material is fit to displace western product outside of China.
It may have, in other words, greater market impact.
There should be no doubting Beijing’s zeal when it comes to reforming its aluminum sector.
It will result in closures, the only question is how much. On that subject the debate rages hot around the aluminum market.
But unless Beijing can work out how to stem the rising tide of “semis” into the world market, there will be no relief from the multiple trade pressures.
Its problem is that it has spent years micro-managing its aluminum sector down the value-added product chain.
This is a system now designed to produce aluminum and convert that metal into “semis”. The more aluminum produced, the more “semis” produced and the greater the overspill of surplus into world markets.
Even if capacity is closed later this year, other smelters will most likely simply lift output in compensation.
This is the message from China’s steel sector, currently producing at record levels despite, or rather because of, the success in cutting non-economic capacity.
Years of excess cannot be rectified overnight.
And with Chinese production and exports still rising, the latter more dramatically than the headlines suggest, the already simmering aluminum trade war is only going to get hotter.
Editing by Louise Heavens