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INTERVIEW: Indonesian Bauxite Tax Won’t Have Long-Term Hit On Chinese Aluminum Market – AZ China

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By Debbie Carlson

The impact of Indonesia’s 20% tax on bauxite exports will have a minimal impact on the Chinese aluminum market long-term and the market is already starting to adjust to the higher cost, said a Beijing-based metals consultancy.

Indonesia plans to slap a 20% tax on mineral ore exports by 2014, including bauxite. The nation produces 15% of the bauxite ore and 40% of the Chinese-made aluminum industry uses the ore. There are worries in the industry that this tax will hurt Chinese aluminum makers. However, Paul Adkins, managing director of Beijing-based metals consultancy AZ China, said analysis his firm has done suggests that these concerns are overblown.

China, he said, stepped up its imports of bauxite during March, April and May when it was still unclear what Indonesia would do regarding its bauxite exports. Second, China has cut back some production of aluminum because of a cooling economy, so less is being made, which has lifted prices. Third, he said the refineries that use the bauxite are highly profitable and sell the alumina – which is used in the production of aluminum – to their own plants.

“In the end, the tax will have a small impact on the cost of manufacturing in the long-term. A lot of the concern was the lack of clarity (initially). By year’s end, I think we will have forgotten about it,” Adkins said in an interview with Kitco News.

AZ China is releasing its first in-depth research book on China’s aluminum industry this week, which it calls the Red Book. It will be a quarterly issue, Adkins said.

There might be a silver lining in the Indonesian tax, he said, as it might make other bauxite producers more cost-competitive now.

SMELTERS MOVING TO NORTHWEST

The trend of Chinese aluminum manufacturers moving to the coal-rich areas of Xinjiang and elsewhere in the northwest part of China is well-established, and Adkins said this will only continue. There is about 10 million metric tons of capacity in the region, and this will grow to 15 million tons by 2015, he said.

“They are spreading like mushrooms up there, so any guess on expansion is a moving target,” he said.

Access to cheap energy is the main reason to move, he said. Transportation costs to ship goods and products will increase, but the savings on electricity to run power-hungry aluminum plants will more than make up for higher shipping costs. Electricity makes up about 40% of aluminum costs.

Higher transportation costs are not the real concern with smelters making the move northwest, however. It’s the logistics that will be a significant issue once more plants are up and running as transportation in those regions remains chaotic.

“They can build a railway, but it’s the operation (that’s at issue),” he said.
He said he’s seen the difficulties some railways have had coordinating spur lines, saying, “it’s a nightmare. Multiply that by 100 times; it’s a lot of congestion.”

Just how difficult it will be remains to be seen because many of the new plants are just in the planning stage or have just broken ground. But Adkins foresees widespread logistical problems leading to delays and other woes. “There will be a lot of hidden costs,” he said.

Energy costs are low now, but Adkins said those costs will creep up, particularly as the electricity market there matures.

CHINA TO STILL SUPPORT INDUSTRY DESPITE MONETARY LOSSES

Aluminum prices have fallen to sharply lower levels globally, with London Metal Exchange prices around $1,850 a metric ton. Shanghai Futures Exchange prices remain elevated around RMB15,000, which equates to about $2,359. The Chinese market, Adkins said, operates independent of the rest of the world, which explains some of the price differential.

He admitted this view is not shared by others in the aluminum industry.

While some Western aluminum producers such as Alcoa and Rio Tinto have cut back on capacity because prices are under the cost of production, there’s only been modest cutbacks by Chinese producers. Much of the global aluminum industry is watching China to see if the nation will finally mothball plants. Even though Shanghai prices are higher, they are under the current costs of production for Chinese producers, which is estimated around $2,500.

But that doesn’t matter, Adkins said. China’s state-run economy will continue to support unproductive plants. He gave as example news this week that the province of Henan cut power fees to smelters to increase output. According to Reuters, the cuts will lower production costs by about 1,000 yuan a ton, which is about $160. Henan province is the highest-cost producer in China and he said it will likely cost the province about $500 million on an annualized basis to support the smelters this way.

“That’s $500 million out of their budget to keep smelters operating that were otherwise unprofitable. They’re doing it because they want to keep jobs,” he said.

It’s a decision that non-Chinese have a hard time understanding, but Adkins explained it this way: “it’s not market economics; it’s political economics.”

He said with the Chinese leadership transitioning this year, the government is attempting to quell any potential unrest by keeping people working.

What that will lead to, however, is stockpiling of metal and oversupply, which will eventually depress prices, he said.