Silver as an investment

Exposing How China “Cheats On Trade” In The Aluminum Industry

Since entering the Presidential race last year, Trump has made international trade a cornerstone of his campaign and has promised to go after countries like China that “cheat on trade”.  In fact, the Trump website promises that “day one” his administration will take steps to “designate China as a currency manipulator” and crack down on “illegal export subsidies [that] intentionally distorts international trade.”

On day one of the Trump administration the U.S. Treasury Department will designate China as a currency manipulator. This will begin a process that imposes appropriate countervailing duties on artificially cheap Chinese products, defends U.S. manufacturers and workers, and revitalizes job growth in America. We must stand up to China’s blackmail and reject corporate America’s manipulation of our politicians. The U.S. Treasury’s designation of China as a currency manipulator will force China to the negotiating table and open the door to a fair – and far better – trading relationship.

 

China’s illegal export subsidies intentionally distorts international trade and damages other countries’ exports by giving Chinese companies an unfair advantage. From textile and steel mills in the Carolinas to the Gulf Coast’s shrimp and fish industries to the Midwest manufacturing belt and California’s agribusiness, China’s disregard for WTO rules hurt every corner of America.

As we’ve noted in the past, the aluminum industry provides a textbook example of how China “cheats on trade” and the corresponding impact on U.S. companies.  In fact, the Wall Street Journal recently took a look into the production and trading activities of one Chinese aluminum producer, China Zhongwang Holdings Ltd., that seemingly “cheats” in many of the ways Trump enumerates above.  

As background, China is the biggest producers of aluminum in the world with production fueled by access to inexpensive electricity and tax breaks from the government.  As local demand plummeted in the wake of the “great recession,” much of China’s aluminum production has found it’s way to the U.S….though often not through direct, or technically legal, channels. 

The dumping of cheap aluminum on the U.S. market has decimated domestic production with only five aluminum smelters left in the U.S. down from 23 in 2000.  In fact, Alcoa, the largest American aluminum maker, recently announced plans to spinoff its aluminum production assets in order to isolate its more profitable parts-making units.  Alcoa CEO, Klaus Kleinfeld, attributed the move to illegitimate Chinese exports that were “the major driver” of lower aluminum prices.

Aluminum Production

Back in 2009, U.S. aluminum imports from China surged causing import prices to plunge by 30% and crushing U.S. producers like Alcoa.  That surge in imports and simultaneous price collapse caused the Commerce Department to take notice.  In 2010, the Commerce Department enacted new tariffs on Chinese aluminum imports after an investigation revealed that the Chinese were dumping cut-rate aluminum on the U.S. markets while receiving subsidies back home.

But the story doesn’t end there, of course, as the rabbit hole goes much deeper.  Unable to dump aluminum on the U.S. market directly, Zhongwang Holdings, a large Chinese aluminum producer, found a workaround that involved  rerouting U.S.-bound aluminum through Mexico.  In fact, a review of trade data found that just as China’s export of aluminum to the U.S. collapsed in 2010 they simultaneously surged to Mexico. 

Aluminum Resellers

 

Jeff Henderson, President of a U.S. trade group known as the Aluminum Extruders Council, took note of the shift in Chinese exports to Mexico and decided to dig a little deeper.  As such, he commissioned a plane to flyover a “small” factory in Mexico and, to his great “shock,” found about 6% of the entire world’s inventory of aluminum sitting in the middle of the Mexican desert covered in tarps.

Two years ago, a California aluminum executive commissioned a pilot to fly over the Mexican town of San José Iturbide, at the foot of the Sierra Gorda mountains, and snap aerial photos of a remote desert factory.

 

He made a startling discovery. Nearly one million metric tons of aluminum sat neatly stacked behind a fortress of barbed-wire fences. The stockpile, worth some $2 billion and representing roughly 6% of the world’s total inventory—enough to churn out 2.2 million Ford F-150s or 77 billion beer cans—quickly became an obsession for the U.S. aluminum industry.

 

Aluminum-industry representative Jeff Henderson says he is convinced that China Zhongwang Holdings Ltd., a Chinese aluminum giant controlled by billionaire Liu Zhongtian, tried to evade U.S. tariffs by routing aluminum through Mexico to disguise its origins, a tactic known as transshipping.

Aluminum Stockpile

Of course Liu Zhongtian, owner of Zhongwang Holdings, denies any efforts to avoid U.S. tariffs by shipping through Mexico but the WSJ notes that the records are relatively clear.  Trade records show that hundreds of thousands of tons of aluminum were shipped to Mexico from China through a series of companies, including one owned by Liu’s son and another by someone who described himself as a longtime business associate.

Mr. Liu, a member of China’s ruling Communist Party, denies any connection to the Mexican aluminum or transshipping. “These things have nothing to do with me,” he said in a June interview at his company’s Liaoning, China, plant, where he lives in an apartment inside the factory. He said he wouldn’t know how to establish a business in Mexico, joking that “in that sort of place, there are a lot of killers with guns.”

The flow of aluminum from China to the U.S. gets a little convoluted but the following WSJ graphic boils it down:

Aluminum Resellers

Since Jeff Henderson brought of all these trade manipulations to light, Liu has shifted tactics to be a little “smarter.”  Liu’s son has been replaced as CEO of the “small” Mexican aluminum producer and replaced with a California attorney named Charles Pok.  Pok originally denied having any connection with Liu but later admitted that he did have a relationship which he couldn’t discuss due to “attorney-client privilege”…isn’t that convenient?

But lately, after the Mexico shenanigans were revealed by Jeff Henderson, the Chinese aluminum export game has shifted to Vietnam with exports surging over the past two years.

Aluminum Resellers

 

Of course, much of the “Vietnamese” aluminum will end up on the U.S. market.  In fact, the U.S. has imported some 2,000 tons of aluminum from Vietnam over the past couple of years.  And wouldn’t you know it, Perfectus Aluminum, owned by none other than Liu’s son, is one of the largest buyers.