Wednesday, November 20, 2013

What does the Threat from China Really Look Like?

AEC Past Chairman Duncan Crowdis
Many are questioning whether the recent drive by the Chinese Extrusion Industry to export products off-shore, and particularly into the North American market, is a long term play or simply a temporary solution to satisfy a short term supply-demand imbalance while their domestic demand improves.

It’s a great question and once you look at the data there is an obvious answer and it is about supply and demand. Clearly the domestic industry has been expanding its capacity well beyond the requirement to supply domestic needs within China.

First of all let’s consider the domestic demand in China for aluminum extrusions. In looking at the trend over the past decade, it has been anything but anemic. With domestic GDP running well into the double digits over this period, the demand for aluminum extrusions in the Transportation and Building and Construction industries alone have been able to support a significant increase in domestic capacity. So an increase in domestic capacity was necessary. However as you will see below, the domestic industry has been building capacity well beyond the rate at which demand has been escalating. And it is highly unlikely given the current robust domestic demand trends, that the Chinese industry is building capacity to significantly exceed what the industry has been experiencing.

The next part of the equation is the supply or capacity side.  Based on research by the U.S. International Trade Commissions (ITC) as part of the original fair trade case, the Chinese domestic industry isn’t a lot different than the North American industry, it’s just much larger. In terms of size, the ITC discovered that the production in 2009 was just over 18 billion lbs. which is close to 4 times the size of the U.S. industry. Similar to North America, the Chinese industry is also fragmented with over 700 extruders making up the 18 billion lbs. of production capacity. They have their “big dogs” as well, with 15 companies with more than 220MM lb. of production capacity and the largest one, Zhongwang, at 1.4 billion lbs. Other than overall size, the big difference with our industry is the magnitude of their expansion plans. In 2010, at the time of the ITC study, there were 40 expansion projects on-the-go, which will add another 10 billion lbs of capacity or an increase of almost 60 percent.

That’s right 10 billion lbs., more than twice the total capacity of the US industry!  

That will take them to over 28 billion lb. of capacity.  Zhongwang continues to lead the show with “incremental” capacity that will take them to a total of 1.8 billion lbs. When a Chinese extruder expands, it isn’t like in the U.S. with the addition of a press or two. As an example, the ITC discovered that the Haomei Aluminum Company is expanding by adding 450MM lb. of capacity over a three-year period. This size of expansion is relatively common place with the capacity growth that we are seeing.

Exports from China increased over 10 fold since 2001 and were estimated at 1.5 billion lbs. at the end of 2007. Very little of this went into the US. That all changed in late 2008 and through 2009 as windows into other markets such as Canada and Australia started to close due to new duties on extruded aluminum imports from China being applied by those countries. That was the time when we started to see the impact of what was clearly an “export driven” strategy.

So clearly the Chinese industry is expanding its capacity well beyond any thought that it will be absorbed by future increases in domestic demand. Their expansion plans will take their capacity upwards of 28-30 billion lbs., almost enough to supply the world demand. It is for this reason that the ITC found that, not only was the U.S. domestic industry being harmed by the influx of illegal Chinese imports, but that the infrastructure that is currently being built in China is a Clear and Present Danger to the future of our industry.

If there is any question about the ability, the where-with-all and the strategy of the Chinese industry in terms of exports, the math should make it clear. If we want our industry in North America to survive, we MUST stay the course and fight for Fair Trade practices.

FAIR TRADE: It Matters!

To get involved, contact Rand Baldwin, President of the Aluminum Extruders Council at rbaldwin@tso.net. For more on the Aluminum Extrusion Fair Trade Initiative, visit www.aecfairtrade.org.

This post was written by AEC Past Chairman Duncan Crowdis

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