Guest column: What are the effects of China's aluminum smelters moving into the processing sector?

The central government's strict development path for China's aluminum industry dictates that the expansion of aluminum smelting capacity cannot exceed the consumption volume of domestic aluminum product processing facilities, which has prompted many aluminum smelters to increase aluminum product processing in recent years.

According to Sunlight Metal's figures, China's aluminum continuous casting production capacity, the largest in the world, stands at 3.20 million tons per annum, which accounts for 45.7 percent of the world's total. China can produce 3.65 million tons of hot-rolled aluminum products and 5.20 million tons of cold-rolled aluminum plate and strip per annum, amounting to 15.6 percent and 26.2 percent of the world's total output.

China produces 29.5 percent of the world's aluminum foil, and 42 percent of global aluminum extrusion, with an annual production capacity of 1.30 million tons and 7.59 million tons respectively.

There are numerous ongoing large-scale expansion projects of aluminum processing facilities in China, many of which are aluminum plate and strip projects carried out by both aluminum processors and aluminum smelters.

In recent years, there has been a trend of domestic aluminum smelters branching out into the downstream processing sector. Aluminum smelters that have taken that step can now produce a wide variety and significant quantity of aluminum products, with annual production capacities totaling 760,000 tons of aluminum plate and strip, 200,000 tons of aluminum foil, and 350,000 tons of aluminum extrusion.

Currently, there are more than 2 million tons worth of aluminum processing facility expansion projects in the pipeline or under construction by 14 aluminum smelters.

Sunlight Metal forecast that with the current rate of investment and project timetables, by 2010, China will have an annual continuous casting production capacity of 3.7 million tons, 7.5 million tons of cold-rolled aluminum plate and strip, 1.9 million tons of aluminum foil, and 9.5 million tons of aluminum extrusion.

At that time, China will become the world's largest supplier of every type of aluminum product. However, such a large processing capacity will bring about a series of problems, including raw material bottlenecks that will raise aluminum imports, a severe surplus of aluminum products on the domestic market, and fierce competition to export.

To ensure sustainable development of China's aluminum processing sector, the central government needs to restrict aluminum processors from building new casting facilities, and aluminum smelters from constructing new rolling, foil-making and extruding facilities. In addition, the government could promote industry consolidation between downstream processors and aluminum smelters in order to avoid redundant project construction and increase economies of scale.

Healthy development of China's aluminum processing industry will also require further government guidance and incentive policies in regards to project approvals, bank loans, power prices, and taxes.

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