Transcript CHINA - China Strategies, LLC

AEC 2007 MANAGEMENT CONFERENCE
September 19, 2007
Chicago, IL
China’s Aluminum Industry
 World’s Largest Producer of Aluminum
 2006 output: 9.35 million MT (+17% y-o-y)
 2007 H1 output: 5.7 million MT (+35% y-o-y)
 2007 output (estimated): 11.7 million MT
2
China’s Aluminum Industry
 World’s Largest Aluminum Smelting Capacity
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1997 capacity: 2 million tpy
2003 capacity: 8.3 million tpy
2006 capacity: 11.4 million tpy
2007 capacity (projected): 14.6 tpy
3
China’s Aluminum Industry
 World’s Largest Consumer of Aluminum
 2005 consumption: 7 million MT
 2006 consumption: 8 million MT
 2007 (H1): 5.6 million MT (40% increase y-o-y)
 2007 consumption (projected): 9.6 million MT

July 2007 apparent consumption: 1.0281 MT
 2010 consumption: 14.39 million MT (est.)
4
China’s Aluminum Industry
 World’s Largest In Alumina Refining
 in 2007 alumina output likely will reach 17-20 million
MT.
 In the 2008-2010 period China’s alumina refining
capacity will reach 28-30 million tpy.
5
China’s Aluminum Industry
 World’s Largest In Aluminum Fabrication
 Between 1988-2006 China’s aluminum fabrication industries had
cumulative growth of ~800%.
 1988 output: 416,000 MT
 2005 output: 5.837 million MT
 2006 output: 8.3369 million MT.
 2007 H1 output: 5.023 million MT (+40.9% y-o-y)
 2007 output: 10 million MT (estimated).
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China’s Aluminum Industry
 Declining Exports of Primary Aluminum
 November 2006 export tariff on primary aluminum increased to 15%.

January-August 2007 primary aluminum exports declined by 56.8%.
 January-August 2006 exports: 853,756 MT
 January-August 2007 exports: 368,910 MT
 Growing exports of fabricated aluminum products

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1-7, 2007: 1.19 million MT exports (+88%)
1-7, 2007: 402,177 MT imports (+4%)
1-7, 2007: net exports: ~800,000 MT
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China’s Extrusion Industry
 China’s Capacity to Produce Aluminum Extrusions
 1997 :
2.35 million tpy.
 2004:
4.75 million MT.
 2007:
5.7 million tpy.
 2010:
6.89 million MT (est.)
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China’s Extrusion Industry
 China’s Output of Aluminum Extrusions
 2003:
~ 2 million MT.
 2004:
2.8 million MT.
 2006:
4 million MT.
 2010:
5.52 million MT (est.)
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China’s Extrusion Industry
 Apparent Consumption of Aluminum Extrusions
 1995-2005 average annual growth was 16.4%.
 2005: 3.217 million MT (13.2% increase y-o-y).
 Of that total 65% (2.08 million MT ) were construction, 12%
transportation and 10% machinery manufacturing extrusions.
 compare North American construction extrusions @ 44.5%.
 2010 (est.) construction extrusions will be 3 million MT (60%
of all extrusions).
10
China’s Extrusion Industry
 Characteristics of China’s Aluminum Extrusion
Industry
 ~670 companies operating in China.
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

down from ~ 1100 companies in 2001.
Dali Region: ~ 300 extrusion companies down to less than 100
as of 2006.
2010: ~300 (nationwide)
 average output: 7200 tpy.
11
China’s Extrusion Industry
 Characteristics of China’s Aluminum Extrusion
Industry (cont’d).
 as the pressure from Beijing to reduce pollution and
increase energy efficiency increases the smaller, less
efficient companies will continue to exit the market.
 the larger, more technologically advanced enterprises,
such as Asia Aluminum, Jianmei and Fenglv Aluminum
continue to take market share.
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China’s Extrusion Industry
 Characteristics of China’s Aluminum Extrusion
Industry (cont’d)
 Since 1980 Chinese companies have imported a total of
approximately 3800 extrusion presses.


these account for almost 70% of all presses in operation.
nearly 50% of the new presses come from Taiwan and another
18% or so from Japan.
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China’s Extrusion Industry
 Characteristics of China’s Aluminum Extrusion Industry (cont’d)
 Largest Chinese Aluminum Extrusion Co.’s (2007)
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Asia Aluminum (350,000 tpy )*
Guangdong Fenglv (260,000 tpy) (including new 160,000 tpy Sanshui plant)*
Guangdong Xingfa (150,000 tpy)*. (7% owned by Alcoa)
Taishan Jinqiu (Kam Kiu) ( 150,000 tpy).*
Liaoning Zhongwang (103,500 tpy).
Shandong Huajian Aluminum Industry Co., Ltd. (80,000 tpy to increase to
120,000 tpy by 2010)*
Nanshan Aluminum Industry (70,000 tpy).*
Huachang Aluminum Industry Co. (60,000 tpy).*
Guangdong Jianmei (50,100 tpy). (Japanese involvement)
Shanxi Yangquan Aluminum Industry Joint Stock Co., Ltd. (50,000 tpy)*
Guangdong Haomei Aluminum Industry Co., Ltd. (36,000 tpy to increase to
60,000 tpy).*
 * updated information as of 2007.
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China’s Extrusion Industry
 Exports of Aluminum Extrusions
 net exports of aluminum extrusions (nationwide ):


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1998:
2002:
2003 :
2005 :
2006:
H1 2007:
~ 36,000 MT.
~ 135,000 MT.
~ 155,000 MT.
~ 200,000 MT.
~490 ,000 MT (accounts for ~45% of total world exports)
~381,000 MT.
 exports as a “release value”.
 as Chinese extrusion capacity grew faster than the domestic market could
absorb, exports became a release value, especially since 2004.
 increase in exports as a business opportunity.

as of early 2005 Chinese extruders’ share of the extrusion market in Australia was 20%.
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China’s Extrusion Industry
 Exports of Aluminum Extrusions (cont’d)
 VAT rebates and Tariff Changes


9/15/06: reduced VAT rebates on extrusions from 13% to 11%.
7/1/07: eliminated VAT rebates on extrusions.
 8/1/07: imposition of temporary 15% export tax on non-alloyed
rod and bar (Customs Code #ex76041000).
 are extrusions next?
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China’s Extrusion Industry
 Asia Aluminum
 new “aluminum city” in Zhaoqing (肇庆).
 6 billion Yuan (~$790 million U.S.D.) investment.
 total capacity: 350,000 tpy (extruded products) is 3 times Asia
Aluminum's present capacity and most in Asia.
 because of automation of the new extrusion lines, each line will
only require 3 workers, as compared to the 10 workers per extrusion
press presently required.
 new extrusion lines have been imported from Japan, Germany and
Italy.
 energy efficiency of the new lines will enable the company to reduce
energy consumption by 1/3rd.
 plans to expand its scale and increasing the number of higher valueadded products it produces, including industrial extrusions.
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China’s Extrusion Industry
 Asia Aluminum (continued)
 the growing automotive industry in South China provides
new opportunities for Asia Aluminum's new facilities which
are designed to take advantage of this market opportunity
 exports presently account for 20% of total sales
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the company's exports are growing at the rate of 30%-40% per year
the vast majority of new export orders are coming from Europe and
the Americas.
 last year Asia Aluminum obtained a European Union place of
origin certification.
 presently has a 6%-7% market share in China.
 has gained market share at expense of smaller competitors.
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China’s Extrusion Industry
 Asia Aluminum (continued)
 Asia Aluminum went public in Hong Kong in 1998, then
went private in May 2006. The company has expressed
an interest in going public in the U.S. within three years.
 The extrusion part of the new facility includes the
following four business units: Zhaoqing Asia Aluminum
Aluminum Factory Co., Ltd.; Zhaoqing Asia Aluminum
Metals Research & Development Co., Ltd.; Feinisi
(Zhaoqing) Moulds Manufacturing Co., Ltd. and Asia
Aluminum Testing Center.

Asia Aluminum Testing Center selected by developer of
Dubai’s 808 meter high, $1 billion U.S.D. skyscraper project.
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China’s Extrusion Industry
 Asia Aluminum (continued)
 projected revenue from the Zhaoqing “aluminum city”
operations (including both the extrusion and rolling
parts of the business) is 20 billion Yuan/annum (~$2.6
billion U.S.D./annum).
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Opportunities and Challenges
“机会与挑战并存”
“There Are Both Opportunities and Challenges”

saying widely used in China today
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Opportunities and Challenges
 Industry-wide weaknesses
 Small Scale Production: the industry is still dominated by
small to mid-sized enterprises
 Low Average Output: average output is only 7200 tpy.
 Simple Products: the products which are produced are
predominately simple products.
 Fierce Price Competition: with low end products the sole
basis for competition is price.
 Lack of Intellectual Property: the companies lack their own
intellectual property and the technological component of
products emanating from Dali is low.
 Quality: there still are many quality concerns.
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Opportunities and Challenges
 Regulatory Challenges
 Increasing threat of trade sanctions.
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Because the U.S. may continue to deem China as a "nonmarket economy" for another 15 years after WTO accession,
the likelihood of anti-dumping actions against domestic
industries continues to be high.
Based on the Coated Free Sheet Paper case the anti-subsidies
law has become another trade remedy against China by U.S.
manufacturers.
as exports increase the demands for trade sanctions increase.
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Opportunities and Challenges
 Regulatory Challenges (cont’d)
 elimination of VAT rebates for aluminum extrusions.

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September 2006 VAT rebates reduced to 11% from 13%.
July 2007 eliminated VAT rebates on aluminum extrusions.
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Opportunities and Challenges
 Regulatory Challenges (cont’d)
 reduction of import duties on primary aluminum
Primary aluminum imports reduced to 0% tariff.
 imposition of export tariffs.
 November 2006 export duty on primary aluminum raised to 15%.
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Jan-June, 2007 exports of primary aluminum decreased 76%.

Response of Chinese was to minimally process primary aluminum and
then export
on July 19, 2007 the Ministry of Finance issued an announcement that a
provisional tariff of 15% on non-alloyed aluminum bar and rod exports
would be imposed(Customs Tariff # ex76041000).
 Baotou Aluminum announced that they expect to experience a
decline in profits for all of 2007 due to the elimination of VAT rebates
on aluminum alloy billet and round aluminum rods for electrical uses.
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Opportunities and Challenges
 Quality Challenges: despite improvements, there are still
substandard products which make there way into the
market because:
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chemical composition is substandard (principally where the
amount of trace iron materials is too high).
Overuse of substandard scrap materials .
an insufficient refining process-- iron wasn’t sufficiently
eliminated.
the thickness of the oxidized skin isn’t as required by industry
standards.
the color isn’t uniform (because the oxidation period is too
short—creating a “hot pot-like” (shuai yang rou) treatment (only
4µm to 7µm thick).
the walls of the extrusions are too thin (0.8mm).
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Opportunities and Challenges
 Quality Challenges (cont’d):
 On September 5, 2007 the Bureau of Industry and
Commerce of Guangdong Province issued a product
quality report for construction extrusions.

only 57.8% of those construction extrusions surveyed met
quality standards.
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Opportunities and Challenges
 Overcoming Technical Trade Barriers
 The Case of the “Lead-free 6020 Alloy”

Chinese refer to being subjected to “wave upon wave of
technical trade barriers”.
 in 2003 the European Union promulgated restrictive
environmental standards which, according to the Chinese
affected 10’s of billions of dollars worth of exports.
 in response Fenglv Aluminum Industry undertook a project to
develop the lead-free 6020 alloy, which they were able to do by
early 2007.
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Opportunities and Challenges
 Macro-Economic Challenges
 cost of capital

China’s central bank has raised interest rates four times in
2007
 appreciation of the Yuan vs. the $.
 The Yuan has appreciated approximately 7% since the summer
of 2005 when the Chinese government loosened controls on
the fluctuation of the Yuan.
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Opportunities and Challenges
 Efficiency Challenges
 need to become more energy efficient.

85% of existing buildings in China are not energy efficient
 need to reduce pollution
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Opportunities and Challenges
 Market Challenges
 rapid increases in primary aluminum prices in 2006 and
2007 have put a squeeze on working capital for many of
the smaller aluminum extrusion companies in China.
 rapid increases in extrusion capacity in China puts
pressure on pricing and increases competition.
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Opportunities and Challenges
 Domestic Market Opportunities Abound

China’s per person consumption of aluminum extrusions as of
2001 was 1.2kg compared to 27.2kg for the U.S. and 19.2kg for
Japan.

if China’s consumption per capita were to approximate the
U.S., Japan or Switzerland, total output of aluminum products
would reach 22 million tpy, including 8.8 million tpy of
aluminum extrusions.
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Opportunities and Challenges
 Domestic Market Opportunities Abound (cont’d)
 from the domestic real estate development industry
 from growth of China’s transportation industry
by 2010 Chinese automotive industry demand for extrusions: 900,000
MT
 to help achieve Beijing’s energy conservation goals.
 15-20% of total energy consumption is from buildings.
 from 2008 Olympics games projects
 from 3/07 through 8/08 demand for extrusions by Beijing alone will be
equal to twice European demand for extrusions in that period.

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Opportunities and Challenges
 Domestic Market Opportunities Abound (cont’d)
 “Opening Up the West”
 “Revitalizing the Northeast”
 further development of cities
 from 2010 Shanghai World games
 from 2010 Guangzhou Asia games
 other markets
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Aluminum furniture: 40,000 to 50,000 tpy
Bicycles: 60,000 to 65,000 tpy
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Opportunities and Challenges
 export opportunities
 With China’s accession to the WTO, tariff barriers have
been lowered creating a business opportunity for
Chinese extrusion exports.
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Opportunities and Challenges
 Quality Improvement Opportunities
 Dali has four enterprises whose products have earned
the “China Famous Product” designation.
 Dali products have been incorporated in such high
profile projects as the Shenzhou #6 spacecraft and the
2008 Beijing Olympics venues.
 the China Non-ferrous Metals Industry Associations’
Aluminum Construction Profiles Permit Issuance Office
has issued 550 permits (since 2004).

since the permitting system went into effect, the quality of
construction extrusions has improved greatly and the number
of substandard products in the market has greatly diminished.
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Opportunities and Challenges
 Product Mix Opportunities
 energy efficient windows, doors and curtain wall products.

both renovations and new construction
 50% of energy inefficiencies are from windows and doors
 high end products are in short supply in China.
 there is an insufficient scale of production for high end products.
 market opportunities are substantial in high end products.
 in China today construction extrusions now account for 70% of total
output and industrial extrusions account for 30% of total extrusion
output up from an 80:20 ratio as of 2005, though still less 55:25
ratio common in industrialized countries.
 foreign industrial extrusions account for 70% of the industrial
extrusion market in China
37
Opportunities and Challenges
 Internationalizing Operations
 Strengthening financial accounting standards.

by steadily bringing their financial accounting in line with
international accounting standards.
 Developing relationships with foreign entities.

examples:
 Kamkiu becoming member of AEC and AAA.
 Kamkiu’s relationship with Thermal Processing Technology
Center of the Illinois Institute of Technology.
 Hiring locals (ex. Kam Kiu’s business development persons in
North America) and expats to work in China.
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Opportunities and Challenges
 Professionalizing the Industry
 in 2002 the Guangdong Non-Ferrous Metal Technology
Innovation Center was established.
 in 2004 the the Nanhai Aluminum Products Industry
Association was established and the Development
Strategy for the Nanhai Aluminum Products Industry
was launched.
 mutual recognition of quality standards between Nanhai
and the European Union.
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Opportunities and Challenges
 Financing Growth
 from being part of Chalco

ex: Southwest Aluminum
 from internal growth
 ex: Jinqiao Aluminum (Kamkiu).
 from foreign investment
 ex: Alcoa’s purchase of a 7% interest in Xingfa Aluminum
 ex: Indalex once owned 26.6% of Asia Aluminum
 ex: Japanese interests are running Jianmei Aluminum.
 from stock markets
 ex: Asia Aluminum
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Role of the Chinese Government
 The Central Government is not a Monolith.
 It provides “guidance”.

In late April 2007 Foshan Customs issued a “reminder” to
extrusion exporters that they should follow policy “directions”
to slow exports in order to reduce the “trade frictions” that
have risen along with increases in exports of aluminum
extrusions.
 It sets macroeconomic policy
 Example: has the ability to change tax policy.
 In September 2006 China’s central government reduced VAT
rebates on aluminum extrusions from 13% to 11%.
 In July 2007 VAT rebates on aluminum extrusions were
eliminated.
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Role of the Chinese Government
 The central government is not a Monolith
(cont’d):
 It advises the industry on international trade issues.
 The Chinese Central Government encourages restraint


it admonishes companies to exercise self-restraint
it uses macro-economic levers to make exporting more
expensive.
 example: eliminating VAT rebates on extruded products.
42
Role of the Chinese Government
 The central government is not a Monolith
(cont’d):
 the importance of local governments.
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their goals are economic development and employment.
they provide the bulk of the incentives for further
development of the extrusions industry
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Role of the Chinese Government
 Incentives given by local governments
 The Zhaoqing Example

Preferential Land Acquisition Costs
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Zhaoqing city controls the Zhaoqing New Technology Industrial
Development District
it is state-owned land, so the city has no land acquisition costs.
posted rate for industrial land there is 50,000 Yuan/mu (approximately
$240,000/acre) yet the city is willing to give “corresponding preferential
treatment on land acquisition costs” based on such factors as nature of
the industry, investment, projected output, etc.
 an even greater “preferential land acquisition cost is available for
Fortune 500 companies, foreign and domestic notable companies,
central government designated high technology projects, projects that
will yield high tax revenues and other projects which will have an
impact.

it is likely that Asia Aluminum received its land at a nominal cost or without
cost.
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Role of the Chinese Government
 Incentives given by local governments (cont’d)
 The Zhaoqing Example

tax relief:
 foreign investors who establish a productive enterprise in the
Zhaoqing New Technology Development District with a term
of 10 years or more do not pay enterprise income tax for the
first two profit-making years and pay ½ of enterprise income
taxes due for the next 3 years.
 40% of enterprise income taxes already paid by enterprise s on
amounts reinvested for at least five years in the Zhaoqing New
Technology Development District are rebated.
45
Role of the Chinese Government
 Incentives given by local governments (cont’d)
 The Zhaoqing Example

loans: six of the largest banks in China have extended credit
to Asia Aluminum in the approximate amount of 3.8 billion
Yuan (about 50% of the 8 billion Yuan cost of the project).\

municipal fees: all administrative fees “within the authority
of the government "payable by enterprises in the Zhaoqing
New Technology Development District will be waived; all
service fees will be ½ of the minimum fee normally paid; costs
only will be collected for various licensing matters.
46
China’s Response to Foreign Trade
Challenges
 Chinese View: companies lose anti-dumping actions
because :
 1) they do not vigorously defend against the actions (in
part because of the high legal fees involved); and
 2) they do not have a good financial accounting system
in place and therefore are not in a good position to give a
detailed and complete accounting of production costs.
47
China’s Response to Foreign
Trade Challenges
 China Non-Ferrous Metals Processing Industry Association: Chinese
companies must rely on their association (who under WTO rules may
answer a trade suit on behalf of the industry) and band together to
respond to anti-dumping actions.
 Example of Chinese extrusion industry response to South Africa’s
Anti-Dumping Case.
 Response organized by Foshan city Foreign Economics and Trade
Bureau.
 Presentation by Beijing’s Gaopeng Law Firm whose assessment
was that the Chinese extruders had a “high degree of success”.
 Determination not to “lightly” concede the South African market
and to respond to the case (though only Guandong Jianmei
signed on while the others are still evaluating)
48
Lou Schwartz
China Strategies, LLC
www.chinastrategiesllc.com
412-521-1846
[email protected]