May 22, 2018 / 12:37 PM / a month ago

COLUMN-Why is China's aluminium output so hard to count? Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters)

* China's aluminium production: tmsnrt.rs/2Lna0QS

By Andy Home

LONDON, May 22 (Reuters) - China is the world’s dominant producer of aluminium, having ramped up production to more than half of global output, from less than a quarter at the turn of the century.

The turbo-charged expansion has outpaced even China’s voracious demand for the metal, inciting increasing protestation from the rest of the world over the resulting flow of exports and lack of transparency from China’s alumunium sector.

The culmination of these tensions is the United States’ decision to impose tariffs on aluminium imports.

Many will be affected, but the No.1 target is China, already the subject of a lengthening list of product-specific U.S. anti-dumping duties.

Given China’s central role in the aluminium market and trade dynamics, it’s curious how hazy its internal workings are. Even the most basic questions are surprisingly difficult to answer, such as how much of the stuff does China actually produce?

The official figures have always been problematic, but the divergence with reality has grown ever wider over the past year.

Which is why the International Aluminium Institute (IAI), the publisher of production figures for the rest of the world, is changing the way it counts Chinese production.

Graphic on China's aluminium production, the official version and the unofficial version: tmsnrt.rs/2Lna0QS

LIES, DAMN LIES, AND...

The IAI’s monthly bulletins on global aluminium production have for many years used data supplied by the China Nonferrous Metals Industry Association (CNIA).

CNIA is a government association, which should lend authority to its figures. The same applies to the National Bureau of Statistics, which also publishes monthly run rates.

The two official counts haven’t always tallied in the past, but they have run broadly in tandem over the past couple of years.

Unfortunately, both have displayed the same propensity towards monthly volatility and been subject to occasional huge revisions, most recently in January 2016, when CNIA added more than four million tonnes of production back into the historical figures for 2011 to 2014.

That’s a lot of aluminium to go statistically missing. And a lot more went missing last year, to the point that the IAI’s own adjustment to the CNIA count amounted to 3.65 million tonnes.

The IAI is now going to provide its own estimate, using information supplied by CNIA as well as state research group Beijing Antaike, local analyst Aladinny and the non-Chinese research house CRU and, potentially, others.

Based on this new methodology, the IAI estimates China’s aluminium output was 2.96 million tonnes in April, equivalent to 56 percent of total global production.

COUNTING PROBLEMS

But how is it that two of China’s state agencies, CNIA and Antaike, can’t agree on how much aluminium the country produces?

Aluminium smelters aren’t clandestine back-yard operations. Or at least they haven’t been since Beijing forced the closure of smaller plants more than a decade ago.

Modern Chinese smelters are huge, literally too big to miss, even from satellite imagery.

Is the Chinese government massaging the figures to appease international criticism of its growing dominance of the supply chain? Conspiracy theorists would love to think so, but why would it merely open up statistical gaps that invite the curious to explore.

The truth is almost certainly more complex and more chaotic.

One part of the conundrum may be down to the way the Chinese aluminium sector has evolved, raw production capacity being vertically integrated with semi-manufactured products capacity.

Those big 2016 revisions, for example, were down to one of China’s largest producers failing to report any aluminium production because the metal had all been transformed into products and was no longer only aluminium, strictly speaking.

Several Western producers do the same in their public accounts because what comes out of their plants isn’t crude metal but aluminium wheels, tubes or structures.

Such nuances are further complicated by the increasing use of “hot metal” transfers between Chinese smelters and product makers, meaning that aluminium can literally melt before being counted.

But the real statistical damage was done by Beijing’s move last year to eliminate what it designated as “illegal” capacity, meaning that built without the full panoply of permits.

That’s when the gap between analysts’ and official tallies started yawning ever wider.

“Illegal capacity” dropped out of the official figures from one month to the next in a statistical adjustment that bears no reality to how long it takes a smelter to wind down production.

If it wound down production at all.

Systemic under-reporting of so-called illegal capacity by operators to authorities would go a long way to explaining the statistical mists that have clouded China’s aluminium output ever since Beijing’s supply-side reforms swept into the sector.

The ability to offset closures of such capacity against mandated winter heating season closures may well have added a whole new dimension to the counting game.

CHINA ALUMINIUM INC?

Whatever the detailed mathematical workings, the key takeaway is that if state statisticians are struggling to count how much aluminium China produces, then so is Beijing.

It’s easy to think of China’s aluminium sector as a single leviathan entity, operating efficiently under the watchful eye of the state. But China’s aluminium producers are split along multiple fault lines — between state and private ownership, between “clean” hydro and “dirty” coal power, between “old” east coast and “new” northwestern. And more recently: between “illegal” and “legal”.

Beijing has long struggled to exert full control over its fractious aluminium sector, which is one of the reasons it has grown so monstrous.

The current drive to eliminate capacity is the most serious attempt yet, but it is still very much a messy work in progress and subject to all sorts of pushback and wheeling-dealing from operators and regional governments.

Statistical clarity has been lost in this chaotic reform process.

The IAI’s decision to move from a single set of officially sanctioned figures to a multiple-source estimate is a recognition of the confused reality.

But remember, when it comes to how much aluminium the world’s biggest producer actually produces, it will only be an estimate.

Editing by David Goodman

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