Black China Blog

Here is a piece written by the head of UC Rusal, Oleg Deripaska, which appeared recently in the Wall St Journal.   I would not call this an unbiased view!

China now boasts by some measures the second-largest economy in the world. Undoubtedly, the country today is the ultimate driver in Asia and is a key player in the global economy. And in coming years it will play an even more significant role. So it is understandably tempting to view the country as an unbendable force of nature, especially when it comes to manufacturing, and especially in heavy industries that depend on the ability to mobilize large amounts of capital and large numbers of workers. Yet this image is deceptive. As my own company has found, China presents opportunities for foreigners to supply it in these areas. The key is to find the right ways to take advantage of those opportunities.

Aluminum is a good example of the complexities of China’s industrial economy. The country’s rapid industrialization and urbanization have sparked a consumption boom in aluminum for various industries. Aluminum is a key component in the cables that deliver the Internet to China’s growing number of Web surfers; an average of 130 kilograms of aluminum go into each of the 13.6 million cars that were sold in China last year; aluminum is employed in countless parts of the 8.5 million new residential units that were sold in China in 2009. Today, China is the world’s largest producer and consumer of primary aluminum, representing about one-third of global production of 37.7 million metric tons and consumption of 34.3 million metric tons in 2009. Yet China’s consumption still is lower than in developed economies, at 10.5 kilograms per capita per year, compared to up to 13.1 kilograms per capita in the developed world. China’s consumption is likely to double as the economy grows.

China may struggle to meet this aluminum demand. That might come as a surprise given its reputation in other industries. For instance, the country’s ability to produce large quantities of steel is making itself felt in lower prices around the world. The same is true in electronics and consumer manufactured goods. Aluminum is a different game, however. For one thing, China struggles to power its aluminum industry. On average it takes some 17.4 megawatt-hours of electricity to produce one metric ton of aluminum (compared to only around 5.7 MWh of electricity to smelt one metric ton of steel). That energy intensity is why the world’s smelters tend to be located in areas that have access to abundant power resources (hydroelectric, natural gas, coal or nuclear). Yet China remains heavily dependent on coal to meet its electricity demand. The coal is neither cost-effective nor environmentally friendly.

Production efficiency of aluminum smelters is another key problem. The average production costs of most Chinese producers are around $2,000-2,100 per metric ton of aluminum, whereas the current aluminum prices stand at around $2,260 per metric ton. If that price falls below $2,000 per metric ton, as much as 80% of China’s aluminum production capacity may become unprofitable. At present time about 25% of aluminum production volume in China is unprofitable. Meanwhile, benefiting from access to cheap hydro-power and as a result of cost-saving initiatives, Rusal can produce at a cost of only $1,653 per metric ton (compared to Alcoa’s almost $1,800 per metric ton and to Chalco’s $2,000 per metric ton, according to research company Brook Hunt).

Given the Chinese government’s desire to improve economic efficiency more broadly, and its aim to address environmental concerns, China could eventually put offline all of its least efficient aluminum production, freeing up energy and diverting it to other important state projects and urban consumers. As that happens, many local consumers will have to look abroad for aluminum. This represents great opportunities for global producers. Chinese companies are already struggling to secure a stable supply from domestic producers, and the world’s major industry players are competing for their share of this very lucrative market.

The key will be figuring out how to compete effectively. Rusal stepped into the game relatively recently—just last year—but we already are enjoying a measure of success. Our advantages include a relatively low-cost, renewable and environmentally friendly energy supply and our location only 500 kilometers from the Chinese border—proximity that leads to huge transportation savings. In 2009, China accounted for 6% of our revenue. Our aim is to increase our sales to China by 50% to one-third of total sales in the long term. Meanwhile, we are taking advantage of areas where China does have a competitive advantage in manufacturing. For instance, we have two production facilities in China that supply our Siberian smelters with cathodes that are used in the electrolysis process that separates aluminum from alumina.

China has already demonstrated its strong will to balance the growth speed with quality and efficiency for a healthy national economy. The aluminum industry is but one example of how this might open surprising opportunities for China’s trading partners. In a matter of a decade we will see a completely different China. The question is who is going to be the first to leverage this change.