- Top producer of metal using glut to make higher-value products
- Changing market spurs Alcoa to split as Liu swallows Aleris
China’s emergence as the world’s biggest aluminum maker has shaken up the industry, creating a surplus that forced competitors to close plants as profit fell. Alcoa Inc., an iconic American producer for more than a century, has shuttered smelters in the U.S. and plans to split itself in two.
While some companies begin to show signs of stanching the red ink, there’s probably more disruption ahead.
After dominating the market for raw aluminum, China wants to expand its ability to make higher-value products with the commodity. The biggest step so far was the announcement last week that Chinese aluminum entrepreneur Liu Zhongtian will acquire Cleveland-based Aleris Corp. for $2.3 billion. The deal gives the founder of China’s largest producer of extruded aluminum greater access to American and European technology, as well as buyers that include aerospace manufacturers like Boeing Co. and automakers such as Audi.
“This was a different kind of move by a Chinese company,” Yi Zhu, an analyst at Bloomberg Intelligence, said by phone from Hong Kong on Aug. 31. “Previously, China went after raw-material assets abroad, but this is about going to the downstream, and it fits with the Chinese government’s goals to upgrade manufacturing and the economy.”
Liu’s move follows decades of sweeping changes in the industry. When he founded China Zhongwang Holdings Ltd. in 1993, the country accounted for less than 10 percent of global production of primary aluminum, the basic product churned out by smelters. Now, it’s 55 percent. Surging output has eclipsed domestic needs, spawning a flood of cheap exports that aggravated a global surplus amid stagnant demand. Prices this year, on average, are the lowest since 2003 on the London Metal Exchange.
While Liu is expanding a business already focused on processing metal rather than producing it, he’s not the only one getting into that market. Even as Chinese smelters continue to expand their capacity to make the raw commodity, the country is also expanding the number and capabilities of rolling mills that shape the aluminum into higher-end products.
China’s exports of rolled sheet and plate last year were equal to about 7 percent of world demand and will grow further, according to London-based CRU Group, a commodity researcher. The country produced more than 60 percent of the world’s aluminum foil in 2015, and last year it became a net exporter for the first time of the specialized aluminum sheets used to make beverage cans for soda and beer.
China’s move into the more lucrative, higher-margin markets for processed aluminum is still in its infancy and may take years to peak. The country has very little capacity to manufacture products that need to meet strict specifications common in the automobile and aerospace industries. That means China can either build its own plants that employ the industry’s newest technologies, or acquire existing assets from someone else. The Zhongwang group, which is also building a flat-rolling complex in Tianjin, northern China, is doing both.
The Aleris deal “could be the shape of things to come” as Chinese companies add downstream capacity and capabilities by acquiring overseas assets, Charlie Durant, a principal analyst CRU Group in London, said by e-mail on Sept. 1.
“Further market integration could ultimately encourage more exports out of China, particularly in higher-value-added rolled products, where Chinese players have yet to have much of an impact,” Durant said.
The push for more downstream business mirrors a long-term shift for China’s economy, in which manufacturing has to become more sophisticated as the economy matures and domestic demand increases. Getting rid of surplus capacity and encouraging China’s industries to produce more value-added products is one plank of President Xi Jinping’s attempt to maintain growth that last year was the slowest since 1990.
“The Chinese government has set clear development goals for the aluminum industry that emphasize not only quantity increase, but more importantly quality improvement,” Zhang Shiping, the chairman of aluminum producer China Hongqiao Group Ltd., said in an Aug. 12 statement.
China is a fast-growing consumer of the metal. Annual demand for aluminum will rise 6 million tons by 2018 as the country uses the metal in more cars, construction projects and aircraft, China Nonferrous Industry Association, a state-affiliated group, said in a WeChat post on Aug. 23. That’s up about 18 percent from consumption of about 32.5 million tons last year, according to Beijing Antaike Information Development Co., a researcher affiliated with the CNIA.
While China has expanded, primary aluminum output in the rest of the world hasn’t changed much since the 2008 financial crisis. Average profit margins at the world’s top producers shrank to the lowest in 30 years in 2015, according to data compiled by Bloomberg Intelligence. Chicago-based Century Aluminum Co. may be forced to shutter its smelter in Kentucky state amid stiff competition from China, according to Chief Executive Officer Michael Bless.
Alcoa, which has been around since the 1880s, plans to break into two companies, with one focused on mining and smelting while the other, called Arconic, will be in the business of producing value-added products, just like Aleris, Novelis Inc. and Constellium NV. For its part, Alcoa insists the split-up isn’t motivated by the emergence of China. In addition to two plants in the U.S., the company is operating smelters in Iceland, Norway, Spain, Brazil and Canada.
“Innovation across the future Arconic businesses is unmatched in the industry, and our research and development pipeline is robust,” Shona Sabnis, a spokeswoman, said in an e-mail response to questions from Bloomberg. “Our continual and fast-paced innovation will allow Arconic to successfully compete against all peers and deliver value for our customers and shareowners.”
Zhongwang’s deal is the third-biggest investment Chinese firms have ever made in the metals industry. The biggest was Aluminum Corp. of China’s $14.2 billion purchase of a stake in Rio Tinto Plc in 2009, followed by Glencore Plc’s sale of the Las Bambas copper project in Peru to MMG Ltd. for $7 billion in 2014. Zhongwang’s swoop on Aleris was by far the biggest-ever investment in the value-added end of the market.
Liu is buying Aleris via his Zhongwang USA LLC unit, which is separate from Liu’s China Zhongwang company. The Chinese company may take over the Aleris assets “as and when appropriate" in the future, China Zhongwang said. Shares closed 2.6% percent higher at HK$3.89 ($0.50) on Tuesday in Hong Kong, the highest since April 28.
A reshuffling of the world’s aluminum supply chain is inevitable when one country controls half of smelting capacity, according to Paul Adkins, managing director at Beijing-based AZ China Ltd., an industry consultant. “You have to ask yourself what other aluminum assets out there could go for a song. This is a win for China, a win for Zhongwang, and a win for Aleris.”
— With assistance by Martin Ritchie