By Andy Home
London

When is a state bail-out not a state-bail out? In the case of China’s beleaguered aluminium smelter sector, when it takes the form of a “commercial” stockpiling programme apparently.
“Commercial” in the sense the government will not actually buy the metal itself but rather facilitate the financing and cover the interest payments.
The programme will be coordinated, it seems, by the State Reserves Bureau (SRB), which doesn’t actually want the metal and which may be mindful of the last time it was strong-armed into buying up surplus aluminium in 2009.
Indeed, the SRB, or possibly its masters in the National Development and Reform Commission, is this time exacting a price on smelters in the form of production restraint. The more capacity a smelter takes off-line the more metal it can “sell” to the stockpile.
It’s a messy compromise and one that won’t address the underlying problems of a bloated sector plagued by supply indiscipline and structural overcapacity.
It’s not just China’s aluminium producers who are looking for government assistance in the face of collapsing metals prices.
Everyone’s in on it. Copper producers. Nickel producers. Zinc producers.
Copper and nickel producers might have more success in getting the SRB to buy their unwanted metal. Both metals are on the SRB’s shopping list since China is structurally short of both.
The same cannot be said of aluminium. China is awash with the stuff. That much is clear by the tonnages being talked about for the stockpiling programme, at least amn tonnes initially and possibly double that. Indeed, China has been pumping out surplus aluminium in the form of semi-manufactured products in ever greater quantities.
Exports of “products”, some of which may challenge the accepted definition of what constitutes a product rather than minimally transformed metal, totalled over 3.4mn tonnes in the first 10 months of this year. That was an increase of almost 600,000 tonnes on the same period of 2014. There is no strategic need for China to stockpile aluminium and the SRB knows it.
Moreover, it may still be regretting the last time it came to the help of the aluminium sector.
In the depths of the Global Financial Crisis it hoovered up almost 600,000 tonnes of aluminium, again at the request of state-owned smelters. The scheme wasn’t a success.
The mistake was to buy at prices above those then prevailing on the Shanghai Futures Exchange (SHFE) with the idea of setting a de facto floor price to the obvious benefit of local smelters.
By doing so, however, it forced open an arbitrage window with the international market through which imports surged.
Imports in the first half of 2009 totalled over amn tonnes. In the preceding six-month period they had been just 61,000 tonnes.
There’s even been suggestions that some of the participating smelters delivered imported metal to the SRB, completely defeating the purpose of the whole exercise.
More fundamentally, the bail-out kept afloat capacity which on economic grounds should have been idled if not completely closed and set the precedent for the sort of “commercial” aid now being requested.
At last someone in the Chinese government is mindful of the underlying cause of low prices in the domestic market, namely chronic overproduction.
The quid pro quo for those smelters participating in the latest scheme seems to be idling production together with a commitment not to restart it any time soon and not to fire up new capacity.
The China Nonferrous Metals Industry Association (CNIA) has come up with a list of production cuts totalling an impressive-sounding 4.91mn tonnes by 41 smelters.
The only problem with that figure is that CNIA’s own figures show China’s aluminium production rising by 17% over the first 10 months of this year. National annualised production in October was running at 31.5mn tonnes, a 3.3mn tonne increase relative to October 2014.
How to explain this glaring discrepancy?
Firstly, there is quite clearly a financial incentive for smelters to report idled capacity if they want to benefit from the stockpiling programme.

l Andy Home is a columnist for Reuters. The opinions expressed are his own.