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China's swoop on Boeing supplier points to aluminium's futureBloomberg07 September 2016China’s emergence as the world's biggest aluminium maker has shaken up the industry, creating a surplus that forced competitors to close plants as profit fell.Alcoa Inc, an iconic US producer for more than a century, has shuttered all but one smelter 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 aluminium, 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 aluminium entrepreneur Liu Zhongtian will acquire Cleveland-based Aleris Corp for US$2.3 billion.The deal gives the founder of China's largest producer of extruded aluminium 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 in 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."Mr 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 per cent of global production of primary aluminium, the basic product churned out by smelters. Now, it's 55 per cent. 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 Mr 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 aluminium into higher-end products.China's exports of rolled sheet and plate last year were equal to about 7 per cent of world demand and will grow further, according to London-based CRU Group, a commodity researcher. The country produced more than 60 per cent of the world's aluminium foil in 2015, and last year it became a net exporter for the first time of the specialised aluminium sheets used to make beverage cans for soda and beer.China's move into the more lucrative, higher-margin markets for processed aluminium 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 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," Mr Durant added.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 aluminium industry that emphasise not only quantity increase, but more importantly quality improvement," Zhang Shiping, the chairman of aluminium producer China Hongqiao Group Ltd, said in an Aug 12 statement.China is a fast-growing consumer of the metal. Annual demand for aluminium will rise six million tonnes by 2018 as the country uses the metal in more cars, construction projects and aircraft, China Nonferrous Industry Association (CNIA), a state-affiliated group, said in a WeChat post on Aug 23. That's up about 18 per cent from consumption of about 32.5 million tonnes last year, according to Beijing Antaike Information Development Co, a researcher affiliated with the CNIA.While China has expanded, primary aluminium 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."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 US$7 billion in 2014. Zhongwang's swoop on Aleris was by far the biggest-ever investment in the value-added end of the market.Mr Liu is buying Aleris via his Zhongwang USA LLC unit, which is separate from his China Zhongwang company. The Chinese company may take over the Aleris assets "as and when appropriate" in the future, China Zhongwang said.Its shares rose as much as 0.8 per cent to HK$3.82 on Tuesday in Hong Kong.A reshuffling of the world's aluminium 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 aluminium assets out there could go for a song. This is a win for China, a win for Zhongwang, and a win for Aleris."
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