Abu Dhabi 24/09/2014 - Reports that a Chinese company has built up massive stocks of aluminium in Mexico have raised eyebrows amid concerns that the duty-free material could head into the US or Europe and depress physical premiums in these regions.
Although China has a 15-percent duty on the export of primary aluminium, shipments of semi-finished and finished metal are tax-free. The country even offers a refund of value-added tax (VAT) on exports of some products, reducing the cost and making it more competitive in foreign markets.
The Chinese company, which has been widely named as China Zhongwang Holdings Ltd in the marketplace, is the second-largest industrial aluminium extrusion product developer and manufacturer in the world and the largest in Asia and China.
According to market participants, the company has exported primary metal under the guise of tax-free semi-products in recent months and now holds around 650,000 tonnes - some believe the number to be even higher at 850,000 tonnes - in Mexico.
"It's mainly profiles, extrusion material which is imported in the form of semis, and once in Mexico they remelt it into billets," an industry source said. "The [profit] margin is something like 30 percent."
In essence, the company uses liquid metal to export raw metal in the guise of a semi-finished product, Paul Adkins of AZ China said.
"Simply pour the hot metal into a continuous caster, run the metal one pass through a rolling mill and roll it up into a coil. It is now a semi-finished good, ready for export as 99.7-percent pure aluminium, albeit not in a 25kg form as is usually the case," he said.
Given that material coming out of Mexico is free of duty for shipment into the US and Europe, concerns have mounted that the stockpile could be sold in the shape of billets at below-market value in either region, which would be quite unsettling at this time of year when annual contract negotiations take place, FastMarkets understands.
But freight costs - rail and truck - from the stockyard in Mexico into the US could be as much as 5 cents per pound simply to get to Texas, with additional costs to get to the benchmark Midwest region, a well-informed source said.
This would make it hard for these duty-free billets to compete with Midwest premiums of around 14 cents, especially with the Aluminium Association in the US considering anti-trust action, the source added.
"I don't think the stock is a threat to the US market given the freight. But it could well go into Europe," another source said, noting that shipping costs out of Mexico to European destinations are reasonable. Shipping rates to Brazil, another potential end-market, were much higher, he said.
Generally, analysts have been predicting an increase in Chinese exports of aluminium in the form of duty-free semis, which should help fill the supply deficit outside China.
According to JP Morgan analyst Natasha Kaneva, Chinese semis production is expected to more than double between 2010 and 2018, with flat-rolled products seeing the strongest growth.
"Even as Chinese semis consumption is also expected to double during this period, the Chinese domestic semis market will likely remain in substantial and increasing surplus, prompting exports to the rest of the world, especially in other parts of Asia," she said in her latest report.
"The popular wisdom is that if China increases exports, it will be in semis. And this is true," AZ China's Adkins also said.
(Editing by Mark Shaw)