View From a Height

Bauxing Day

Yes, Boxing Day was yesterday, but the title was just too good to pass up.

If anyone wants to see what "industrial policy" can do, they should take a look at China's aluminum industry. Unlike the steel industry, which has been a problem since at least the Mother of All Industrial Policies, the Great Leap Forward, aluminum has been profitable for some time, but it's gotten out of whack with the country's needs Now the government is trying to crowbar the thing back into alignment.

The booming Chinese economy has kept aluminum prices high, even as the country is a net importer of both aluminum, and a key smelting ingredient, alumina. The Chinese have been trying to slow down their economy. Whether or not they're succeeding depends on what month you read the WSJ. (3/23 - maybe; 4/7 - No; 6/1 - Yes; 8/11 - No; 10/29 - Maybe; 12/21 - No.)

The difficulty is multiplied by the fact that China has only just signed a Memorandum of Understanding to join an international regime to help ensure more accurate statistical reporting of both consumption and production. (China's claims to have passed the US in both categories have to be read as all Chinese economic statistics - you're lucky if there correct to within an order of magnitude.)

Now, with world aluminum prices falling, China has imposed both an export tax on aluminum, and a ban on small smelting plants' importing alumina.

(Here's another problem: the Chinese business media doesn't seem to have discovered basic economics. A recent report attributed falling alumina prices to a major supplier, Jamacia, going offline. It also attributes plants' holding back on their purchases to these falling prices. This is quite obviously garbage of the highly recyclable kind.)

Now, the WSJ quotes analysts and believing that China has neither the capacity it needs, nor the energy is needs to supply that capacity. So even as it's shutting down smaller plants, forcing them to buy importing rights from the larger plants, it's building more large plants.

The simplest expanation is that the government wants to shut down these smaller plants, because they're eating up too much energy. The problem is obvious. If the economy is slowing down, the smaller, less-efficient plants will be the first ones to fold, anyway. If the economy heats up again, that capacity will be lost. And aluminum, unlike steel, goes mostly to private ventures rather than public ones.

Aha! Could that be it? Could it be that the government is shutting down less-efficient aluminum plants in order to conserve energy for the state-owned steel plants? Which provide mostly low-grade steel for government make-work projects? Or maybe it's to make the new plant venture more attractive to the Chinese banks backing it. In either case, this kind of interference suggests that the Chinese still have a lot to learn about basic economics.

Nobody knows, and nobody is going to know, because economic statistics are produced by local governments and parties who are tasked with meeting certain growth goals. Their incentive is still to cook to the books, rather than to provide transparent information for investing. The only real information we have is indirect, like world commodity prices. The Chinese can no more insulate themselves from these forces than anyone else.