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An Article from the September 2004 JOM: A Hypertext-Enhanced Article

Warren H. Hunt, Jr. is a technical consultant with TMS in Warrendale, PA.

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LETTER TO EDITOR

The China Factor: Aluminum Industry Impact

Warren H. Hunt, Jr.

The emergence of China as a global economic force has influenced the technical enterprise generally and a number of industries specifically. The aluminum industry is an example, with effects on consumption and demand as well as production and supply. This article reviews these areas from both a historical and future perspective.

INTRODUCTION

Seldom a day goes by without some reference to China in the news. Recurrent themes such as outsourcing, cheap labor, “westernization,” effects of an overheating economy, currency fluctuation, growth rate, and others often appear. There is little question that the transition of China from a largely agrarian economy to an increasingly modern, industrialized nation over the last 20 years has already had and will almost assuredly continue to have an impact on many aspects of our professional and personal lives. Thus, it is important to better understand the driving forces and resultant responses. A broad perspective can be gained from the experiences of businesses that have worked in China or felt its effects, such as those described in forums such as the recent Metal Processing Institute symposium reported later in this issue. To make the task of understanding China’s impact more manageable and hopefully informative, a selected area will be reviewed. The aluminum industry is one that has been greatly influenced and serves as a useful example of industrial impacts generally.


ALUMINUM CORPORATION OF CHINA

The Aluminum Corporation of China (Chinalco) was formed in February 2001 to serve as the holding company for assets in what has been identified as one of the “pillar” enterprises in China. Chinalco has one subsidiary and 16 domestic affiliates under direct control: nine industrial companies, four research and design institutes, two construction companies, and one trading company. The subsidiary is perhaps the best-known entity, namely the Aluminum Corporation of China Ltd. (Chalco), which includes the bauxite resources, alumina production, and significant primary aluminum production capability. Chalco was formed on Sept. 10, 2001, and was listed on the New York and Hong Kong stock exchanges in December 2001.

Chalco is the only alumina producer and largest producer of primary aluminum in China. Key operating assets include four integrated alumina and primary aluminum production plants, two alumina refineries, one primary aluminum smelter, and one research institute. These assets and their locations are shown in Figure A. Chalco has significant experience in processing the diasporic bauxite ore of China and has alumina refineries located in the four provinces of China that account for more than 90% of the country’s potentially recoverable reserves.

Chalco’s strategy is to leverage its size and vertical integration to expand and seize market opportunities. A number of initiatives are underway in this regard. Chalco has formed a strategic alliance with Alcoa to develop primary capacity and to improve efficiency at the Pingguo Plant. It has recently been reported that Chalco will expand outside of China by making a $1 billion investment in primary production capacity in Vietnam. Further information can be found at www.chinalco.com.cn/
default_1024.htm
.


GROWING DEMAND

China’s economy has been expanding since the introduction of market reforms instituted some 20 years ago, and has been further accelerated by China’s entry in 2001 into the World Trade Organization. A growth in gross domestic product of 9.1% in 2003 has been reported, with similar levels projected in 2004.1 One area where China has been a particularly potent force has been in driving global demand growth for commodities. For example, the China National Bureau of Statistics is quoted in a recent article in The Economist as stating that China accounted for over half of the world’s consumption of cement, 30% of its coal, and 36% of its steel.1 In addition, in 2003 China accounted for 20.6% of copper demand.2 Major drivers are the urbanization of China as well as an increased standard of living and increased consumption of capital goods including appliances and automobiles. It has been forecast that “China will remain a powerful driver of global demand growth for many commodities in 2004 and beyond,” 1 and the image of the “hungry dragon” requiring evermore in the way of raw materials may be an appropriate one.

Turning to aluminum specifically, according to the Aluminum Association’s Aluminum Statistical Review 2002,3 the apparent consumption of aluminum in China was 4.29 million tonnes (Mt) in 2002, making it second only to the United States at 8.45 Mt. Consumption is forecast to grow to 6 Mt/y in 2005, 8.8 Mt/y in 2010, and 14.3 Mt/y in 2020. The per-capita consumption in China in 2002 was 3.4 kg per person per year. This compares with values of 29.3 kg per person per year in the United States, 27.9 kg per person per year in Japan, and 28.2 kg per person per year in Canada. Consumption in China has grown at an average rate of 14% per year from 1998 through 2002.

The market breakdown in China is shown in Figure 1a, 4 and can be compared with that for the United States in Figure 1b. 3 (These figures show U.S. and Canadian producer net shipments of aluminum ingot and mill products plus imports. Net shipments, which exclude intra-industry shipments for further fabrication, are the most accurate measure of industry output to markets because they eliminate duplication. Reported receipts of aluminum for further processing are eliminated.) The Chinese market is more heavily weighted toward building and construction and substantially less toward packaging.

Another indication of prospects for demand growth can be found in the automotive market. In the United States, there are 800 autos for every 1,000 people, somewhat higher than the 600 autos per 1,000 people in the developed world at large. This is in contrast to the figure of only 16.2 autos for every 1,000 people in China.5 From an automotive-production standpoint, China took 40 years to reach the 1 million vehicles-per-year production level. The 2 million level was reached eight years later in 2000; the 3 million-per-year level in 2002; and the 4 million level in 2003. It is anticipated that China will produce 6–7 million vehicles in 2005 and 10 million by 2010,5 putting it roughly on par with the automotive production levels in the United States and Japan.

PRIMARY ALUMINUM PRODUCTION GROWTH

Globalization of the primary aluminum industry has been underway since the 1950s. China has been a significant part of this process in the last decade, particularly in the last few years since the reorganization of Chinese aluminum production capabilities into the Aluminum Corporation of China (see sidebar). Through the end of 2002, there were 135 aluminum smelters in China with a rated production capacity of 5.39 Mt/y.

Actual production was listed as 4.32 Mt/y, making China the largest primary aluminum producing country in the world. The predominant primary producer is the Aluminum Corporation of China Ltd. (Chalco), while three other primary aluminum producers, Shandong Huaxin Aluminum Company, Shanxi Guanlv Holding Co. Ltd., and Qingtongxia Aluminum Group Co. have significant production capacity in excess of 330,000 t/y. The overall production levels were expected to rise to 7.5 Mt/y and 5.4 Mt/y by the end of 2003. Beyond this time frame, projections are for a growth in production capacity to 9.75 Mt/y in 2005 and 13 Mt/y in 2010, with production projected to be 6.75 Mt/y and 10.2 Mt/y in the respective years.4


FIGURES

A. 
   
1a. 
   
1b. 
   
2a. 
   
2b. 

A significant effect of the rapid increase in primary production capacity has been the transition from self-baked Soderberg smelting cells to pre-baked cells. Figure 2a illustrates the recent transition in smelting technology, driven by the rapid growth of high-amperage cells shown in Figure 2b.6 The rapid growth and emphasis on modern prebaked cell technology has a benefit in reducing the environmental impact of primary production. Assuming that forecast growth continues, the higher polluting self-baked cell capacity is expected to be shut down by 2007.

Berthoud of Pechiney6 notes that the primary benefit that China enjoys in the expansion of its primary smelting capacity is a significantly lower capital cost for greenfield expansion compared to Western world projects. His estimate is that while new Western smelters require a capital investment of $4,000/t, those in China cost $1,400–$1,600/t. Interestingly, he notes that the operating cash cost of a greenfield smelter in China is nearly 50% higher at $1,250/t than the $850/t for a Western world smelter. His conclusion is that the low capital cost of the Chinese projects compensates for a moderately attractive cash cost position, and that while the driving force in the Western world is to minimize investment cost, that in China is securing more efficient technology.

IMPACT ON ALUMINUM SUPPLY AND PRICE

China has been adding alumina production capacity in an attempt to meet rising primary production needs. The annual growth rate of alumina capacity from 1990–2002 has averaged 10%, while production output has increased an average of 11.5%. As of 2000, China became the second largest alumina producer in the world. But alumina production growth has not occurred at a rapid enough rate to supply the expanding primary production. As a result, imports of alumina by China have been rising, and in 2002 some 45.6% of the alumina used in China was imported.4 This increased demand has affected the price for alumina, with spot prices approaching $350/t. Worldwide, demand for alumina increased roughly 7.3–7.4 Mt from 2001 to 2003, while capacity increases accounted for only 3.9 Mt.7 The lack of new capacity has required closed (and high-cost) capacity to be restarted and other plants to operate at higher rates of capacity utilization. It is projected that worldwide alumina refining capacity will continue to lag demand until new capacity is added in the 2005–2006 period, which will create a continued tightness in supply and pricing impact. One estimate7 is that spot prices for alumina will likely remain above $300/t during 2004 and 2005.

ALUMINUM FABRICATION EXPANSION

While much attention has been focused on the growth of the primary aluminum production capacity in China, there has also been significant progress in development of downstream fabrication capabilities. Output of semi-fabricated products, including flat-rolled products such as sheet, plate, and foil, and extruded products has grown from 181,000 t in 1980 to nearly 3 Mt in 2002, an average annual growth rate of 15%.8 The Chinese fabrication industry is said to have employed 1 million people in 2002. Extrusion costs are estimated to be 60% of those of extrusion in the United States.

Table I, taken from Reference 8, provides an interesting contrast between the Chinese fabrication industry and the rest of the world. For example, the product mix in the semi-fabricated products area is very different. In China, 30% of the wrought products are flat-rolled products compared to 60% worldwide. From an application perspective, 70% of the extruded products are used in building and construction in China with the remaining 30% applied to industrial uses. This ratio is roughly 40% for building and construction and 60% for industrial use elsewhere.


Technology-wise, it is reported that China lags behind the rest of the world in recovery, thermal efficiency of processing, and die life. In a manner comparable to the primary production area, much of the pre-existing equipment for aluminum fabrication was outdated prior to the recent rapid-growth period. To meet increasing demand, new capabilities are being added. Significantly, these capabilities are much larger scale ingot-casting plants, rolling mills, and extrusion presses. As an example, it is reported that there are 20 brownfield and greenfield projects for aluminum extrusion production in China, including installation of four 500 MN presses and many in the 120 MN range. While the number of extruders has decreased from 1,142 to 620, the production capacity has increased.

A last point made by Jinshen and Zhenchu is that there is increasing consolidation in the Chinese aluminum industry.8 Companies that have primarily been involved in the primary processing area are increasingly interested in greater vertical integration and adding downstream fabrication capability, while large aluminum fabrication companies are contemplating upstream investments.


Table I. Comparision between Domestic and Overseas Aluminum Fabrication Industries

Category
China

World

Number of aluminum alloys
~150
~350
Tempers
~70
~150
Production capacity (t/y)
  A. Intergrated producer
10,000–50,000
200,000–300,000
  B. Extrusion producer
Average 3,000
Average 25,000
  C. Foil producer (max.)
40,000
200,000
  D. Strip and sheet producer (max.)
200,000
1.5 million
Labor productivity
  A. Production value (1,000 yuan per person per year)
~60
~1,500
  B. Foil (0.001–0.009 mm) output
(unit: t per person and year)
100
5,000
Rate of finished products (%)
  A. Extrusion
70–80
80–85
  B. Foil
50–80
90
Equipment
  A. Furnance capacity (t)
6–35
150
  B. Hot continuous-rolling line
None
50
  C. Cold continuous-rolling line
None
Several
Processing rate (m/min.)
  A. Hot rolling
120–240
300–480
  B. Foil rolling
1,000–1,800
2,500
  C. Extruding
15–25
30–80
  D. Casting
0.8–1.5
10–15
Product Mix (%)
  A. Hot rolling/casting stock
20/80
86/14
  B. Building and construction profile/industrial profile
70/30
44/56

THE FUTURE IN VIEW OF THE PAST

In speaking to the 2003 China Aluminum Forum, Alcan Senior Vice President Martha Finn Brooks cautioned the audience “to be mindful of the potential pitfalls that can easily be overlooked in an environment where the upward arc of the demand curve seems to defy gravity.”9 In her talk, she went on to point out prior periods of rapid growth in the aluminum industry, including the Golden Era of the U.S. aluminum industry from 1946–1973 when shipments grew at a compound annual rate of 8.5%, and from the 1970s to 1990 in which the can stock shipments expanded at a 10% rate. Of course these rapid growth periods have been replaced by the slower growth of the mature industry, influenced in no small part by the energy crisis of 1973, the introduction of commodity trading of aluminum in 1978, and the Russian metal shock in 1992–1993. She speculated on the prospects for a further shock to the industry should China’s domestic demand for aluminum stop growing, and stated that she believes that “rather than becoming a destabilizing influence, we see China emerging as a dynamic and valued member of the global aluminum industry.”9

CROSS CONTINENTAL COLLABORATION: REACHING OUT TO CHINA

The exchange of technical and business information between China and the rest of the world has been going on for centuries, but has certainly accelerated in recent years. Whether it’s China’s recent entry in the World Trade Organization or the ongoing discussions between Chinese technical societies and others, there is a two-way thirst for knowledge.

Conferences and meetings have historically been one of the important venues for interchange. Much of the information for this article was mined from the proceedings of the 2003 China Aluminum Forum, held in December 2003 in Beijing, China. Hosted by the China Nonferrous Metals Industry Association (CNIA), a number of organizations collaborated in this conference, including the International Aluminium Institute, Japan Aluminium Association, South Korea Nonferrous Metals Association, and, for the first time, The Aluminum Association. (The 2003 China Aluminum Forum Proceedings is available from the Aluminum Association BookStore at www.aluminum.org.) The Aluminum Association will continue that support at the 2004 China Aluminum Forum, planned for 8–10 December 2004 in Hainan, China. The Association and the CNIA have this year worked together on developing harmonized standards and joint marketing of publications, and discussing the importance of recycling.

Commenting on the importance of these activities to The Aluminum Association and its members, who are largely U.S.-based aluminum producers, association President Steve Larkin said “Our dialogue and efforts in working together this year are the beginnings of real progress for our companies and governments who seek to work together for the global aluminum industry. We look forward to progress on our mutual interests in recycling, standards, and other efforts.”

Collaboration on the professional society level has actually been going on for quite a long time. For example, TMS has had a relationship with the Chinese Society for Metallurgists (CSM) since 1980, and cooperated on a number of fronts, including international conferences such as the Fifth Pacific Rim International Conference on Advanced Materials and Processing, which will be held 2–5 November 2004 in Beijing. As part of its Strategic Plan, TMS has been developing the framework for a joint electronic membership with CSM, which should be finalized soon.

2004 TMS President, Gregory J. Hildeman of Alcoa, Inc., notes how important the development of collaborative relationships is for TMS members and the technical community at large. “We live in a global information age. As an international professional society that promotes the exchange of technical information concerning minerals, metals, and materials, TMS is exploring initiatives such as electronic memberships with CSM to enable scientists and engineers in that region of the world to access the latest technical information.”

REFERENCES

1. “The Hungry Dragon: China’s Material Needs,” The Economist (February 19, 2004), http://www.economist.com/business/displayStory.cfm?story_id=2446908
2. “China’s Growing Appetites,” TNI (Summer 2004, July 26, 2004), http://www.ocnus.net/cgi-bin/exec/view.cgi?archive=50&num=13101.
3. Aluminum Statistical Review 2002 (Washington, D.C.: The Aluminum Association, Inc., 2003).
4. P. Jiazhu, “Current Situation of China Aluminum Industry and Its Development Trend,” 2003 China Aluminum Forum (Antaike, China: Beijing Antaike Information Development Co., Ltd., 2003), pp. 1–11.
5. Y. Jianlai, “Current Situation and Development of China’s Autos Industry and Its Demand for Aluminum,” in Reference 4, pp. 148–161.
6. T. Berthoud, “The Global Challenges Created by the Fast Development of Chinese Aluminium Market and Industry,” in Reference 4, pp. 63–74.
7. J. Salter, “The Global Outlook for Aluminum and Alumina,” in Reference 4, pp. 249–267.
8. X. Jinshen and Z. Zhenchu, “Current Situation and Prospect for China’s Aluminum Fabrication Industry,” in Reference 4, pp. 123–133.
9. M. Finn Brooks, “Insights on the Global Aluminum Industry,” in Reference 4, pp. 89–112.

For more information, contact W.H. Hunt, Jr., TMS, 184 Thorn Hill Road, Warrendale, PA 15086; (724) 776-9000, ext. 226; (724) 776-3770; e-mail whunt@tms.org.


Copyright held by The Minerals, Metals & Materials Society, 2004

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