(MENAFN- Gulf Times) China exported 2.5mn tonnes of unwrought aluminium and aluminium products in the first half of this year.
That was 35%, or 650,000 tonnes, higher than the same period of 2014.
Most of what leaves China is in the form of semi-manufactured products. The rest is largely aluminium alloy with a very small amount in the form of primary metal, the stuff that's traded on the London Metal Exchange.
China has long penalised exports of primary metal with a 15% export duty. Exports of "semis" are not only exempt from the tax but qualify for a refund of value added tax (VAT). The policy is intended both to reward producers for investing in value-add product capacity and to prevent the export of an energy-intensive commodity from a country short of energy.
Well, that's the theory at least.
Because hidden somewhere in that flow of products out of China is a stream of "fake semis", metal that has been minimally transformed with the sole purpose of gaming the export tax differentials.
Awareness that all is not as it should be with China's exports has been growing over the last year or so.
But with aluminium prices once again pressuring producer margins, US producer Alcoa has decided to speak out publicly about the "fake semis" trade.
China's exports of "fake semis" are "the major driver" of lower aluminium prices, according to Klaus Kleinfeld, Alcoa chairman and CEO, talking to analysts on the company's Q2 financials conference call.
What irks Alcoa and other non-Chinese producers is the fact that they have been steadily shuttering capacity only to see the resulting supply-demand deficit filled by Chinese exports. The company has revised upwards its estimate of global surplus this year by 400,000 tonnes to 760,000 tonnes.
But the headline figure masks two very different market dynamics. In the world outside China Alcoa forecasts a deficit of 1.465mn tonnes. In China itself, though, the outlook is for a surplus of 2.227mn tonnes.
China is exporting that surplus in the form of semi-manufactured products.
If they were all genuine products, Alcoa would be less concerned. Kleinfeld once famously described China and the non-China aluminium world as parallel universes, each doing its own thing with the 15-percent export duty acting as a natural barrier.
Now, however, "these two planetary systems" are colliding with "fake semis" the problematic conduit, a leakage of Chinese surplus in a form that directly competes with primary metal in the rest of the world. Just how big is the "fake semis" trade?
A ball-park figure might be around half amn tonnes a year out of a total semis flow of 3.7mn tonnes last year.
But in truth it's almost impossible to know given it must by definition operate below the radar of China's customs department. It is, after all, an illegal trade, "stealing money away from the Chinese people," as Kleinfeld bluntly expressed it.
The basics of the trade lie in that differential between the tax treatment of primary metal and products, which qualify for an effective 13% VAT rebate.
The economics of passing primary metal off as semi-manufactured product can be enhanced by false invoicing. The VAT rebate is based on the sales price of the "product", meaning the higher the price, the higher the rebate.
The key distribution channels appear to be other Asian countries such as Vietnam and Malaysia with analysts poring over import and export data for evidence that in part they are no more than transhipment points for remelted Chinese metal that will ultimately enter the primary supply chain elsewhere.
And it's an easy metallurgical process. At the end of the day it's all aluminium with minor technical modifications.
Paul Adkins, analyst at AZ China, explained to the Reuters Base Metals Forum how it worked for foil products.
These are made from 1000-series alloy. "That's pretty much the same alloy that some export plate is made from. Once that plate is remelted, all you need to do is add some grain refiner and you have the same raw material that foil is made from," Adkins said.
So, how is this illegal flow of "fake semis" going to be stopped?
Alcoa's Kleinfeld said it was his "strong assumption" that the Chinese authorities would themselves try to close it down.
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