A major complaint frequently lodged against Chinese industry, frequently by US politicians or media outlets, relates to state-subsidized industrial production that allows Chinese producers to sell below cost in international markets. Most recently these complaints are focused on the aluminum industry. In the graph below, one can see the dramatic increase in Chinese aluminum production over the past 13 years.
In one of his last acts as President of the United States, Barack Obama launched a formal complaint with the WTO with regards to artificially low-interest rate loans that allow Chinese aluminum facilities to modernize their facilities and increase production. Going back to the graph, however, one can see the major dip in production in January of 2016, which many attribute to falling aluminum prices due to oversupply. Are Chinese aluminum producers really immune to market forces, as so many have suggested?
News stories also report on subsidies for coal, electricity and other inputs for the production of aluminum. Coverage reached its shrillest pitch upon the discovery of a massive aluminum stockpile in Mexico, which was subsequently shipped to Vietnam, becoming a part of an even larger stockpile valued at over $5 billion. Some suspect Chinese aluminum producers are engaging in such movements in an attempt to avoid protective US tariffs that prevent firms from “dumping,” or selling below cost, in US markets. Such huge volume, however, has broader implications for the economics of aluminum production, as many worry the movement of a stockpile of such tremendous size has the potential to impact aluminum prices in markets around the world.
Some of these beliefs, however, do not mesh with other aluminum production numbers coming out of China at year’s end. In fact, Chinese aluminum output growth was at its lowest level since 2009 in 2016. Between decreased output growth and a global supply glut, this year may signal a shift in the global aluminum market, with stabilizing levels of production which could allow demand and prices to stabilize as well.
Sources consulted:
http://www.wsj.com/articles/u-s-launches-formal-wto-complaint-over-chinese-aluminum-1484234628
http://www.wsj.com/articles/giant-aluminum-stockpile-was-shipped-from-mexico-to-vietnam-1480588228
https://news.metal.com/newscontent/100720886/what-changes-happen-in-china-aluminum-market-in-2016-after-price-surges-smm-exclusive
http://www.wsj.com/articles/aluminum-billionaire-planning-escape-from-china-lawyer-1482953518
http://www.reuters.com/article/us-aluminium-trade-ahome-idUSKBN1501Y8
This is interesting analysis; while some industries have tried and failed to manipulate prices by limiting supply, as it appears China is trying to with its moving of the Mexican stockpile, others have been somewhat successful. The diamond industry has been notorious for restricting supply for quite some time. [the prof: for diamonds, since 1889 though weaker the past decade]
This a phenomenon that is not just limited to China, as well. Coming from Maine, I’ve heard first hand from friends working in the lumber industry that Canada has often been in the habit of subsidizing their logging companies in order to make their prices more competitive in the US market, straining US loggers. At the center of this issue is the fact that most land used for this purpose in Canada is publicly owned.
With the new administration setting its sights on trade “unfairness”, such subsidization and supply restrictions could be in the crosshairs of the US Federal government in the near future.
I agree, not only will these types of situations be interesting from a domestic (US) policy standpoint, but also a foreign one. The way foreign governments respond to changes in US trade policy could have just as much of an impact as those policy changes in the first place.
I think that the story of the aluminum stockpile in China as well as their current position in the ForEx market mark an ominous future for the Chinese. If and when these stockpiles begin hitting the market, the price of aluminum should fall, devaluing a huge export for China. At the same time, once China runs out of international reserves to help support the Yuan on the international market, their currency should, in theory, depreciate once forced to float. I think these combined will hurt the Chinese economy. Producers will begin to face worse open market prices for their commodities and given that much of this is sold internationally, a devalued domestic currency will further exacerbate this issue. I am curious what others think the implication of this is?
I think we can all agree that China still has one of the world’s largest reserves of cash, though this has been depreciating at rapid rates due to efforts to maintain the Yuan’s PPP equilibrium with the dollar. I am more skeptical of whether China’s overall position in the metal industries are really as big of a cause for concern as compared to their devaluating currency. Also, alot of Chinese data is infamous for their lack of reliability, and I think the government has more intentions than most people really realize. I agree that in theory, producers facing worse open market prices will have less incentives to keep producing, and the devalued domestic currency does not help China’s cause. I am confident, however, that prices for these metals will stabilize in the long run because China’s industrial machine feeds itself on the consumption of these heavy metals (aluminum, steel, etc). My main statement is whether or not we can really trust China’s industrial data.
I think it is a well known fact that China manipulates trade figures as well as data about trade, particularly when the United States is the purchaser. Whether that’s just a little bit or a massive amounts as the Trump administration suggests is certainly up for debate. As you suggest, I think everyone assumes this trade manipulation almost always has to do with energy (coal and other inputs for electricity), your looking at aluminum production puts this into a different light. If you take China’s $5 Billion dollar stockpile and production figures at face value, we can expect them to have major control over the trade and pricing for at least the immediate future. While sure, we think of the first use of aluminum as storing leftovers, it’s also used to make military equipment, namely airplanes. It’s worrisome that China might be able to halt US military expansion, growth, or modernization through its control of this very basic input.
Manipulating trade data is hard for a big country because the US and others count imports, so you can compare data on Chinese exports to US imports. Since aluminum is produced in a limited number of places, transshipping doesn’t really let you fudge the numbers. In addition there are private data consultancies for all major (and likely all minor) commodities, that get data from an array on non-public sources (eg companies). I assume “Andy Holm” is one such company.
I agree with Caroline that manipulation of the aluminum market by the Chinese government initially seems to be another worrisome example of China leveraging their expanding industrial capacity. However, as with manipulation of RMB, this type of artificial market support may prove to be unsustainable. The drop in aluminum production growth to 2009 rates shows how the Chinese economy often flexes its market power in an aggressive posture only to see stabilizing factors correct China’s manipulation. Similar to foreign exchange, it seems from this post that China’s manipulation of the aluminum market will begin to decrease over the next couple of years. Patience seems to be the key to overcoming the challenges the Chinese economy poses to U.S. interests.
I think that is interesting, but shouldn’t the US be able to do more than just wait for market forces to correct Chinese trade violations?
Anytime seeing a drop that significant is cause for worry, but, in this rare occasion, could be beneficial to the global market. I do not believe the Chinese government is manipulating the aluminum market but rather realizing the dangers of having huge output on a global scale. The Chinese can still profit off the current prices but soon, the prices will be too low even for them. Fox news (link below) and many other news articles posted an article stating the government’s “promises” to cut back on aluminium production, something China has been promising since 2009. It’s not surprising that they have not been successful with such attempts as local officials and producers of aluminium do not want to lose out on potential revenue. This would be the equivalent of telling our coal miners to stop mining coal and doing their jobs because the world has too much coal right now. Nobody wants to lose money much less their jobs. Yet, we can see brief success of China trying to limit aluminium production with the massive drop in supply but it was a short lived victory for China. The supply rebounded as producers began using their idled machinery again.
http://www.foxnews.com/world/2016/09/13/china-vows-to-cut-aluminum-output-but-producers-plan-growth.html
I wonder how much of output can actually be regulated by the government? Are producers disobeying orders or are they completely free to do as they please?
Provinces and large municipalities have a lot of ability to ignore Beijing. Aluminum is not unique. However, it’s a losing game for those producers, they are fundamentally unprofitable and so paying subsidies is not a healthy strategy, it undermines local government finances and at some point the price will fall such that they will have nothing for their efforts except local government debt.
This is an interesting topic in regards to the economic data China publishes and the true state of the nation. Do you think that these aluminum figures can be taken at face value? I remember when Leland Miller, W&L alum and founder of China Beige Book, came to campus a couple years ago he talked about the illegitimacy of GDP numbers coming out of China. While the government likes to talk about their robust growth year over year, the numbers they publish are significantly higher than what they actually are.
That being said, if this is the case for aluminum as well then we could have a big problem on our hands, as the U.S. is the largest importer of this precious metal. How much do you think we can do to prevent this “manipulation” of the market? While there are international checks and balances in place to restrict countries from having significant advantages, I think that there are many ways that countries are able to dodge these regulations.
Leland Miller was speaking specifically of GDP data. With local / provincial government officials rewarded for local growth, the central government really can’t produce a good GDP number. However, there are few or no incentives to misreport most other data, and many can be cross-checked against other data (eg, inputs against output).
I think this issue requires a global perspective. I wonder if we could think about this sort of subsidy in terms of the classical model of comparative advantage often presented in ECON 102. We might say that any country capable of producing a good at a lower opportunity cost ought to produce it, since this sort of specialization makes all countries better off in absolute terms. However, if China is producing aluminum at a loss in order to gain the geopolitical position of power associated with producing most of the global consumption of an important industrial metal, this may be an issue of political rather than economic competition.
1: “Dumping” is a legal, not economic, jargon. It is part of US trade legislation to provide a safety valve, which specifies how to calculate whether there is “dumping” in great detail. Those rules make no sense from an economics perspective (eg, you can use your estimates in certain situations, even if company financial statements show those to be nonsense – foreign companies provide the Intl Trade Commission copious internal data to try to not be found in violation of the law, I’ve been a party to two antidumping cases.
2: Aluminum is similar to steel and coal, with local government owned firms, some demonstrably inefficient, continuing in operation despite being unprofitable. That distorts prices for everyone else, but as noted in a comment above Beijing finds it very hard to shut down such firms: even if they issue an “order” there’s no way to enforce it, local police and courts answer to the local government, not Beijing.