Excess capacity in the global aluminum market as a result of non-market forces and government support appears to be a genuine concern with implications for global competition and the design of trade rules disciplining government support, according to a report released Tuesday by the Organization for Economic Cooperation and Development.
The aluminum sector has seen major changes over the course of the last 15 years, notably with China's rise to becoming the leading producer by a wide margin in most segments of the value chain. The aim of the OECD report released Tuesday was to measure distortions in the international aluminum value chain.
"Results show that non-market forces, and government support in particular, appear to explain some of the recent increases in aluminum-smelting capacity," the report states. The researchers noted unprecedented output in the aluminum industry has fuelled concerns about excess capacity in the sector that is depressing global aluminum prices and threatening the viability of producers worldwide.
Government support was found to be common throughout the aluminum supply chain; however, it was found to be especially heavy in China and countries of the Gulf Cooperation Council, which includes Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain and Oman.
The report looked at 17 of the largest companies operating in the aluminum value chain, representing more than half of global smelting capacity. Researchers found these companies received up to $70 billion in total government support throughout 2013-2017. While all 17 companies received some form of support, it was highly concentrated with the top five recipients receiving 85% of all support, most of which was targeted at the smelting stage of the value chain.
The OECD also found a key difference in the nature and scale of support that was received. Chinese companies obtained all of their support from Chinese authorities, notably financial subsidies, which overwhelmingly benefited Chinese producers, while most other companies in the study were multinationals that obtained support in the different places in which they operate, predominately in the form of non-financial support and in lesser amounts.
The vast majority of financial support was provided by China's state-owned banks to Chinese aluminum state-owned enterprises, however two private firms also benefited from SOE bank support, China Hongqiao, the world's largest producer of primary aluminium, and China Zhongwang, China's largest producer of extrusion products, the OECD found.
"While governments participate in the aluminium value chain via SOEs, state influence is at least as important as ownership because SOEs are both recipients and providers of support - especially in China, where SOEs provide SOEs and private producers alike with below-market-cost inputs and loans," the report states. "This fluid relationship between the government and companies generates opacity around the form and scale of government support."
Additionally, upstream subsidies provided to smelters were also found to provide significant support to downstream activities.
"Looking across the whole value chain also shows subsidies upstream to confer significant support to downstream activities, such as the production of semi-fabricated products of aluminum," the report states.
Two implications for the design of trade rules emerged from the analysis: government support needs to be understood in the context of value chains, as upstream support has the effect of supporting downstream production; and subsidy rules need to better account for the influence of the state in regards to the dual role of SOEs as recipients and providers of support and what this means for the transparency of support policies, including at the WTO, the OECD concluded.
The report noted the 10% Section 232 tariff on aluminum imports introduced by the US in March 2018, but said it was too early to assess what impacts, if any, the tariffs will have on aluminum trade.
