The Enlightenment of Foreign Aluminum Industry Development to Domestic Aluminum Industry

Inspiration from the development of foreign aluminum industry to the domestic aluminum industry Since the discovery of bauxite in the world for the first time, the aluminum industry has come a century away. During this period, China’s aluminum industry has also gone through more than 50 years of development. Under the guideline of “prioritizing the development of aluminum”, China’s aluminum industry has achieved remarkable results. Especially after rapid development in recent years, China has become the focus and highlight of the global aluminum industry. In 2001, China's primary aluminum production capacity reached 4.33 million tons, ranking first in the world and accounting for 15.7% of the world's total production capacity. In 2003, China produced 5.419 million tons of primary aluminum, accounting for 24.7% of the world's total production. However, in the new economic situation, China's aluminum industry has also produced some new problems. The more prominent problems are the rising cost and the ability to avoid risks. If these problems are not solved properly, it will seriously restrict the sustainable development of China's aluminum industry. From a global perspective, the test that China is facing today is also a problem that foreign aluminum dealers have encountered for more than a century. Here, the author summarizes the experience of the development of foreign aluminum industry in order to benefit the development of the domestic aluminum industry. I. Differences and gaps in the aluminum industry at home and abroad 1. Production costs are not advantageous Although there are cheap human resources, China's alumina and electricity costs are high, and the lack of economies of scale in primary aluminum producers causes primary aluminum production costs to be at a disadvantage. The impact of alumina prices and electricity costs was particularly significant in 2003. It was calculated from the average cost of imported alumina in China from 2001 to 2003 and the mid-level electricity price. In 2001 and 2002, the average cost of “Alcan” and China’s primary aluminum was not divided. Zhong Bo. By 2003, due to the high price of imported alumina and the rise in domestic electricity prices, China's primary aluminum production costs far exceeded “Alcan”. From the comparison of the production cost structure between Chinese and Western aluminum plants, it can be found that the proportion of alumina and electricity in China's primary aluminum production cost structure is 77%, compared with 63% in foreign countries. The larger share of the two in total costs contributed to the greater alumina and electricity price risks for domestic companies. Comparison of Production Cost Structure between Chinese and Western Aluminium Plants in 2003 (%) China Typical Electrolytic Aluminium Plant Western Typical Electrolytic Aluminium Plant Alumina 45 41 Electricity 32 22 Labor Cost 2 11 Aluminum Anode 10 1 Excipient 1 3 Other 10 9 Source: “ The Impact of China's Accession to WTO on China's Non-ferrous Metals Industry (1) The cost of alumina production is high. The high cost of alumina production in China is mainly due to the congenital deficiency of bauxite. Bauxite is divided into two types: shallow-buried ore-bearing bauxite and easily-mined, laterite-buried bauxite ore with deep deposits and difficult mining. China's bauxite deposits are mainly sedimentary, and the ore in Shandong, Shanxi, Henan and Guizhou mainly belongs to this type, so the mining costs are relatively high. In addition, about 98% of China’s bauxite reserves are diaspore-type bauxite, which belongs to low-alumese, high-silicon low-iron ore with low insolubility conductivity, and foreign bauxite is mostly aluminum-silicon. Diaspore. It is difficult to use the domestic Bayer process to produce alumina from domestic bauxite, and only the sintering method and the hybrid method can be used, resulting in increased energy consumption, complex processes, long production cycles, and high production costs. In addition, China's weathered shell bauxite symbiotic and associated with a variety of minerals, but also increased the difficulty of production of alumina and production costs. Therefore, compared with other major alumina production countries in the world, China's alumina production costs are relatively high. China needs one ton of alumina to produce US$170.8, while Brazil only needs US$147, Jamaica needs US$154, and bauxite-rich Australia. It only costs $104. 2003 Major Alumina Exporting Countries Manufacturing Cost Comparison National Capacity (10,000 tons/year) Cost (US$/tonne) Australia 1398 104 China 595* 770?8 Brazil 342 147 India 184 124 Jamaica 358 154 Source: WTO Accession to China Impact of the Non-Ferrous Metals Industry * Chinalco's 2003 capacity (2) Electricity prices rose too fast. The production of 1 ton of aluminum requires about 10-15 kilowatt hours of electricity, so cheap electricity is very important for the cost of aluminum production. After continuous innovation of primary aluminum smelting technology in China, tons of aluminum power consumption has a certain advantage compared with the world. In 2003, the average power consumption per ton of aluminum in China was 15045 degrees. According to IAI data, the energy consumption per ton of aluminum in North America is 15224 degrees. Source: IAI, "China Aluminum" However, China's electricity prices are higher than abroad, resulting in savings in electricity consumption is not enough to make up for the increase in the cost of electricity prices, the overall cost of electricity is inevitably higher than foreign standards. From the following figure, we can see that through comparison with other regions, China's electricity cost accounts for 32% of the total production cost, which is a relatively high level on a global scale. Source: CRU (3) Production Decentralization Reduces Scale Advantages. Another factor that raises the cost of aluminum production at the plateau is the failure to fully realize the scale effect. China’s primary aluminum production and production capacity ranks first in the world, but production is decentralized, and the productivity level per unit of enterprises is far below the level of foreign countries, and it is difficult to form a scale effect. In 2003, the average production capacity of primary aluminum plants in China was 56,700 tons/year, while the average primary aluminum production capacity in foreign countries was 199,000 tons/year, and the average production capacity of primary aluminum enterprises in the world was also 116,000 tons/year. Source: "China Aluminum", "Different Analysis of Aluminum Industry at Home and Abroad" In addition, the concentration of China's aluminum industry is not enough. In 2003, the top nine companies in the world ranked by primary aluminum output produced between 700,000 and 3.5 million tons of primary aluminum, and China Aluminum, which is located in the 9th place, produced approximately 720,000 tons of aluminum. Most of China's primary aluminum production capacity is below 100,000 tons. By the end of 2003, there were 147 primary aluminum producers in China and 117 primary aluminum producers with production capacity below 100,000 tons. The decentralized experience has deviated from the development trend of the global aluminum industry, resulting in the overall loss of economies of scale in the Chinese aluminum industry. Source: "China Aluminum" 2? Avoidance of price risk Insufficient capacity (1) The alumina purchase method causes cost risks. Alumina constitutes a major risk factor in the production cost of primary aluminum, which is not unrelated to China’s alumina purchases and purchase methods. The output of alumina in China has not been able to meet the needs of the domestic market for a long period of time. Every year, a large amount of imports are needed to supplement it. In 2000, it imported 1.88 million tons, imported 3.34 million tons in 2001, and imported 4.57 million tons in 2002. The proportion of the domestic market is: 30%, 41%, 45%. On the spot purchase method for alumina, more short-term contracts and decentralized purchases are used. The large amount of alumina imported from the spot market has caused the domestic alumina market price to change with the changes in the international spot market. Due to the small amount of alumina on the international spot market, it is highly vulnerable to factors such as emergencies and market speculation. The price fluctuations are very large, ranging from US$120/ton to US$400/ton. This caused great fluctuations in the domestic alumina market price, and China's primary aluminum enterprises also paid a huge price for this. (2) Using the shortage of futures markets to create price risk. China's electrolytic aluminum enterprises not only face the risk of alumina, but also bear a relatively high risk of fluctuations in primary aluminum prices. The basic functions of futures market hedging and price discovery are essential tools for the normal operation of primary aluminum and its upstream and downstream industries. Foreign aluminum producers and aluminum consumers are actively involved in the futures market. The price of primary aluminum is usually based on LME terminal pricing, which is quoted on the LME exchange plus the price determined by the port premium and discount. This pricing method helps to lock sales. Or purchase price to avoid risk of price fluctuations and stabilize production. There has also been an upsurge of investment when China’s aluminum futures market was just established. However, after 1998, due to various reasons, the speculative power in the futures market has weakened causing the lack of liquidity in the market, leading domestic aluminum producers to use futures to evade price risk. Second, the experience of the development of foreign aluminum industry As mentioned earlier, the aluminum industry in China today facing the problem of competition is the problem encountered by the aluminum industry in western countries yesterday. In the process of solving these problems, Western countries have taken many measures, accumulated rich experience, and some have become long-term strategies to guide the company's operations. On the basis of existing data, it can be summarized as low-cost management and avoidance of price risk. Mainly reflected in the following two aspects: optimization of raw material allocation and technological innovation in terms of cost, including strategic resource allocation, merger and reorganization and international cooperation, technical innovation and low-cost management on a global scale; signing of long-term contracts and modernization in operations Market management of risk management. 1. Optimize the allocation of resources and reduce costs Since the 1980s, the foreign aluminum industry has used different comparative advantage resources worldwide and gradually implemented the industrial division of labor, which has spawned a number of large-scale aluminum multinational companies globally. At the same time, mergers and reorganizations among different companies and international cooperation are also conducive to concentrating funds for technological innovation, thereby reducing production costs and increasing production efficiency. (1) Strategic resource allocation, merger and reorganization, and international collaboration. Primary aluminum producers continue to search for cheap bauxite resources globally and reduce overall alumina production costs by shutting down high-cost mining bauxite mines. "Alcan" is an example of continuously optimizing the allocation of bauxite. Alcan has a non-metallurgical-grade alumina smelter in the UK, but by the second quarter of 2002, after acquiring GOVE's low-cost bauxite mine in Australia, Alcan closed the UK's smelter so that the company can always guarantee aluminum. The mine is in the low cash cost line. Through mergers and reorganizations, scale advantage will be achieved. On December 15, 2003, “Alcan” received a 92.2% stake in Puki, and this transaction stabilized “Alcan” as the world's leading aluminum and packaging company. After the merger, the capacity of the aluminum smelter reached 4.1 million tons/year, and the alumina production capacity (including non-metallurgical grade alumina) increased from 4.4 million tons to 6.5 million tons per year, making “Alcan” the global share of low-cost production capacity. Big company. The merger will not only promote “Alcan”'s advantages in scale, financial strength, technical resources and costs, but also realize technology sharing – Puki’s advanced melting technology and low-cost primary aluminum production can enhance “Alcan” globally. Competitiveness. In addition, by integrating the service and logistics of the assembly line and the head office, improving procurement efficiency, optimizing production equipment, and cutting R&D and capital expenditures, the company can save costs by US$250 million annually. In addition to Alcan, the formation of the Russian aluminum industry is also a well-known example of complementary advantages and resource reconfiguration. Rusal is made up of a combination of alumina shortages and sufficient two aluminum companies. The combined company not only possesses rich experience in the purchase of alumina and sales of metal aluminum, but also ensures stable capital flows. Together with the strength of the two companies, the competitiveness of the Russian aluminum industry in the international arena is also greatly enhanced. A few days ago, Rusal Aluminum and Hydrolud are also cooperating in a plan to establish an aluminum consortium. (2) Technological innovation. With regard to technological innovation, “Alcan” also continues to make a difference. “Alcan” uses the Bayer process in an alumina smelter in northern Australia. In the Bayer process, relatively cold bauxite ore is required to be injected into the hotter solution and the mixture is then heated. Australia's alumina engineers have increased production by reducing direct injections of steam and have saved significant amounts of raw materials. In innovative technology, they directly heated the bauxite smelt. The implementation of the project increased alumina production by 22,000 tons, while reducing the amount of corrosive solution injected into 4000 tons, and reduced greenhouse gas emissions. 2?Comprehensive Risk Management When comparing the aluminum industry at home and abroad in the front, we found that one of the distinctive features of China's aluminum industry is the high degree of volatility in production and operating costs, which is the risk. In controlling price risk, the common practice is to adopt and integrate upstream and downstream enterprises and implement a modern market risk management system. At the operational level, in addition to the LME terminal-based sales price that we discussed earlier, the signing of long-term contracts for raw materials and energy is also the main way for producers and suppliers to evade grid fluctuations and supply shortages. (1) Vertical integration management. Many electrolytic aluminum plants in the world use self-built power plants and aluminum power associations to reduce costs and prevent electricity risks. Of the aluminum plants owned by Canada Aluminum, 62% have their own power plants, and the lesser ones are then purchased from the power companies by long-term contracts. Alcoa's 40% of the electricity used for electrolytic aluminum is provided by captive power plants. Vertical integration not only includes energy integration, but also involves all areas of the aluminum industry - mining, aluminum processing, aluminum recycling, etc. In Alcoa's sales revenue, aluminum ingots only accounted for 15% of total revenue, alumina and chemicals accounted for only 8%, transportation, packaging, and construction projects accounted for 23%, 22%, and 12%, respectively. (2) Develop a modern market risk management strategy system. Market risks include risks such as commodity prices, exchange rates, interest rates, and transportation costs. At present, foreign large-scale aluminum companies are focusing on the formulation of market risk management strategies - "risk portfolio management." Take BHP Billiton (BHP), a diversified mining giant, as an example. BHP has established a set of new comprehensive strategic systems in market risk management to support the company's financial goals and protect the company's future financial security and flexibility. The system is based on quantitative analysis of many risks and opportunities in the BHP portfolio, and it is based on the analysis of financial market analysis into the application of natural resource assets. By adopting a “self-insurance” approach, management risk is in a portfolio model. This means that BHP will apply "natural hedges" as the main risk management method through a combination of scale, decentralization and flexibility. (3) Signed a long-term contract between alumina and electricity. At the operational level, the most common way to avoid the price risk of raw materials and energy is to sign long-term contracts. Both companies have to a certain extent circumvented the volatility of the market price over a longer period of time and the risks of normal production and operations. Take Hydro-Norway as an example. The company signed a major agreement on June 13, 2003: From 2005 to 2030, Norway's Hydro will purchase alumina from Comalco Aluminum Co., Ltd. Comalco's alumina will guarantee the company's alumina supply to Australian companies. Hydro's subsidiaries in Australia produce about 200,000 tons of aluminum per year. At the same time, for Comalco, the deal provided a major outlet for the new alumina plant in Gladstone, Queensland. The long-term contract also includes the power supply company signing a longer-term power supply contract based on LME aluminum prices. For example, “Alcan” and the electricity purchase agreement signed by the British Columbia government are calculated based on “electricity price = LME aluminum price × 15.5%/14.45”. The signing of power contracts is mainly to avoid the risks caused by fluctuations in electricity prices. In the long run, the price of long-term contracts is lower than the average price of short-term contracts. III. Inspiration of foreign experience for domestic aluminum enterprises From the summary of experience in the development of foreign aluminum industry, it can be found that foreign aluminum companies basically conform to the trend of global aluminum development. On the one hand, they continue to adopt measures such as technology, management innovation and vertical integration. To reduce production costs, on the other hand actively participate in the futures market to hedge against price risks and ensure stable operations. In China, many aluminum producers have realized the importance of reducing costs, such as lowering the cost of electricity through signing long-term contracts for power supply or aluminum and electricity joint ventures. According to incomplete statistics, at present, there are 32 companies in China that use electric aluminum to jointly manufacture primary aluminum, of which 10 are joint ventures of hydro-aluminum and have a built capacity of 190,000 tons. Coal-electricity-aluminum joint production is used. There are 22 companies and 1.21 million tons have been built. However, in order to avoid price risks and stabilize operations, the awareness of aluminum producers needs to be strengthened. In particular, the enthusiasm and ability to use the futures market to evade price risk are still low. Therefore, we suggest that the domestic aluminum industry must strengthen its concept of value preservation and awareness, and increase its ability to participate in hedging operations. From the perspective of the future development of domestic aluminum supply and demand and aluminum futures market conditions, we believe that aluminum companies have the necessity and feasibility of participating in the maintenance of value. 1. The necessity of aluminum companies participating in hedging From the perspective of China's aluminum supply and demand in the near future and in the coming years, it is necessary for aluminum producers to participate in the futures market. China's primary aluminum production has increased rapidly in recent years. In 2001, China's primary aluminum production capacity has leapt to the top of the world. In 2002, electrolytic aluminum production ranked first in the world. In 2003, production continued to grow to 5.419 million tons, accounting for 24.7% of the world's total production. With the increase in output, aluminum consumption also showed a high growth rate. From 1998 to 2002, China's aluminum and aluminum alloy consumption maintained an average annual growth rate of 14%, which was higher than the GDP growth rate. At the same time, the average growth rate of aluminum consumption in the world and Western countries was only 2.9% and 1.1% respectively. In 2003, China's aluminum consumption was 5.127 million tons, accounting for 18.8% of world consumption. 2002-2003 can be said to be a turning point in China's aluminum industry. China has changed from a net importer of primary aluminum to an exporter of primary aluminum. In 2002, China's net export of primary aluminum was 280,000 tons, even more in 2003. It is up to 450,000 tons. When China's output growth rate is higher than the demand growth rate, it is the export that guarantees the supply and demand balance of China's primary aluminum market. Source: "China Aluminum" But in 2004 and beyond, China may have a regional surplus of primary aluminum. In 2003, the investment in China's electrolytic aluminum industry increased by 92.9%. According to Antaike's survey data, as of the end of 2003, there were 19 alumina projects under construction and planning and construction projects throughout the country, and the electrolytic aluminum scale was 3.09 million tons. If all these projects are completed, the national electrolytic aluminum capacity will reach 10 million tons, far exceeding the domestic market demand. In the international aluminum market, the oversupply of primary aluminum will be improved in the next few years, but whether the international market can completely absorb the surplus aluminum production in China is still a question. China's primary aluminum exports still have many variables. First of all, in 2004, China began to implement an export tax rebate rate of 8%. The reduction in export tax rebates will lead to the shift of domestic production capacity to domestic production and sales, and the pressure on domestic aluminum supply will increase. Second, the Chinese renminbi appreciated its value. If the renminbi appreciates, the price of aluminum exports will be substantially reduced, and the profits of aluminum companies will decrease. Later, the rising cost of aluminum production in the future may lead to a decline in the competitiveness of aluminum in the international market. Because in addition to the cost of electricity, the increase in the international alumina gap will also increase the purchase cost of alumina in China. Since the import of alumina in China is close to half of the demand, the increase in this cost will seriously affect the overall production cost. Compared with foreign long-term alumina purchase contracts, the competitive position of aluminum producers will be further reduced. Therefore, in the process of seeking an international market, it is not completely guaranteed that surplus production will be digested, and as China's primary aluminum relies more and more on the international market, economic development in all countries in the world will also have a more important impact. Aluminum companies have to face more volatile price risks. When enterprises face greater price risk than end products, they may have a series of unstable factors such as finance and production. If these instability factors form a vicious circle, they may cause the company to stop production or even shut down. 2. The feasibility of aluminum companies participating in hedging The participation of aluminum companies in the futures market requires the function of the futures market to avoid risk and price discovery. To achieve this goal, the market has sufficient liquidity and the package capacity of the spot market is Required. During the period from 1998 to 2002, the capacity and liquidity of China's aluminum futures market can be said to be insufficient. The chart below compares the volume of transactions between the Shanghai Aluminum and London Aluminum futures markets, China, and global aluminum production and consumption. From the data in the figure, we can see that Shanghai-Aluminium turnover was thin from 1998 to 2000, and the ratio of transaction volume to production and consumption was basically 1.45/1.46, but the ratio between the annual volume of London Aluminum and the annual output of global primary aluminum was stable. Between 21-26. Therefore, the function of the futures market failed to function properly during this period of time. Source: CRU, LME, SHFE, Aluminum Corporation of China Source: China Futures Association, SHFE But after recent years of development, Shanghai Aluminum's transactions have become more active. In particular, since the fourth quarter of 2003, the aluminum futures trading volume on the Shanghai Futures Exchange has increased rapidly, and the turnover in October and November increased by 157% and 80% year-on-year. Shanghai Aluminum’s trading volume and open interest have soared in synchrony, setting a record for the number of days since its listing in 1992. In 2003, the transaction value was 321.2 billion yuan, accounting for 2.4% of the national futures market share. During the trading volume of Shanghai Aluminum, the price discovery function in the aluminum futures market has also become increasingly sound. By analyzing the data of SHFE copper-aluminium March price and Huatong spot copper-aluminium price from July 2002 to September 2003, the correlation coefficient between the spot price of aluminum and the futures price has been close to the correlation coefficient between the spot price of copper and the futures price. In addition, the difference between the SHFE aluminum March continuous contract in the sample data and the aluminum spot price quoted in the Huatong market indicates that the spread was stable between plus and minus 400 in 2003, but after 2003, the spread narrowed to plus or minus 200 . In the same period, the difference between the SHFE copper March continuous contract and the Huatong market copper spot quote price is stable and fluctuates between plus and minus 150 yuan. This shows that the relationship between Shanghai aluminum spot and futures prices is closer and more stable, with less distortion. The correlation between the SHFE copper and aluminum futures price and the Huatong Copper and Aluminum spot price sample correlation index of the variety closing price The aluminum spot price and the SHFE three-month contract price of 0.929 The copper spot price and the SHFE three-month contract price of 0.964 and the future China aluminum futures market will more perfect. From the perspective of fundamentals, the positive development momentum of China's aluminum industry, the aluminum consumption potential hidden by China's economic growth, the country’s strategic positioning of the development of the capital market, and the status quo of the upgrade and expansion of the futures market all indicate that China’s aluminum futures market will gradually be solidified. The spot market foundation and strong policy support. Inspired by these factors, Shanghai Aluminium Futures will gradually stick to the market positioning of Lon Aluminium Futures, becoming another example of China's ownership of commodity pricing in the world. In addition, at the end of January 2004, the State Council issued the “Several Opinions on Promoting the Reform and Opening-up of the Capital Market and Stable Development” and clearly stated that “steadily developing the futures market. With the strict control of risks, it is gradually introduced to provide for commodity producers and consumers. Discover commodity futures varieties with price and hedging functions. Establish a market-led variety innovation mechanism. "Therefore, future developments in the futures market tend to be even better. With the above-mentioned economic growth, better orientation of futures market policies, and continued improvement of the exchange trading system, SHFE's aluminum future transactions will be further enlarged to stimulate the enthusiasm for trading in various types of funds, while aluminum companies will also participate in hedging. It will be more apparent.

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