Why China just can’t quit producing aluminum, despite a global glut

Why China just can’t quit producing aluminum, despite a global glut

By Naomi Rovnick — March 12, 2013

Aluminum is a perfect reminder that China does not have a market driven economy. The price of the metal has been seriously weak for the last five years due to a global supply glut, yet China ignores that glut —pumping out a record 1.78 million metric tons in January, according to figures released today—and makes the oversupply worse. Stockpiles of the metals in Chinese warehouses also hit a record high in late February.

It all comes down to jobs and pride

In much the same way that the US and Russia lavished cash on their space programs in the 1960s, China since the late 1980s has worked tirelessly to perfect its aluminum production skills. And China’s economic planners like new aluminum smelters because they are mostly coal fired (pdf, p.175) and thus are useful consumers of the black stuff. The Beijing government has pushed for massive development of new coal mines in Xinjiang in Northwest China for example, and the aluminum plants will be natural customers for the mines. China now has the world’s best aluminum production technology, according to Michael Komesaroff, principal of Australian commodities consultancy Urandaline Investments. But its over production hurts global miners. Rio Tinto has written down the value of Alcan, an aluminum company it bought in 2007, by an estimated$28 billion.

“Aluminum prices won’t do well for the next ten years,” says Komesaroff.

So China’s aluminum  industry is a great window on how its economic planners think. New smelters create jobs for construction workers, smelter staff and miners, and aluminum gives China’s politicians some world class technology to feel proud of in a nation that is best known for making low value consumer goods. Supply and demand is neither here nor there.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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