China’s aluminum industry
As discussed in the last part, China is the biggest global consumer of aluminum. In a lot of ways, it’s also responsible for the current state of the aluminum industry. Let’s analyze the recent trends in China’s aluminum industry.
Contrary to global expectations, China has increased its smelting capacities in the past decade. There are plenty of reasons behind this move. The primary reason is the control over its key raw material. Aluminum, along with steel and copper, was the major raw material that China required for its infrastructure creation. This made China add to capacities in a big way. Another reason is the labor intensity of the aluminum industry, which helped China provide jobs for its population.
The expansion of downstream capacities
Downstream capacities means the processing of primary aluminum into aluminum products. With its low-cost advantage, China has emerged as a global manufacturing hub. Aluminum is a key raw material in a lot of products that China exports. China is becoming a powerhouse in areas like aluminum–based building and construction products, infrastructure systems, transportation equipment, and consumer products. This has made Chinese companies look for self-sufficiency in aluminum.
The chart above shows the growth in Chinese smelting capacity. As you can see, the capacities have increased multifold.
Supply issues hit upstream companies
As discussed, China is not self-sufficient in bauxite, and it imports two-thirds of its bauxite requirements. Indonesia was China’s biggest bauxite supplier, making up almost 70% of China’s imports. Starting this year, Indonesia has banned the export of unprocessed base metals to boost domestic downstream operations.
This has been a big blow to Chinese companies because now they’ll have to rely on imports from Australia, which will increase the landing cost for them. Rising raw material costs will impact Chinese producers’ competitiveness. Mining companies like BHP Billiton (BHP) expect their exports to China to increase due to this.
In the next part, we’ll discuss the demand from the automobile industry, which is the biggest consumer of aluminum products.