The persistence of large Chinese capacity will put pressure on the rest of the global aluminum industry to restructure and consolidate to survive. Already, major players inside and outside China are pursuing strategies like combining assets and spinning off operations, a trend that will only accelerate in the coming months and years.(Ibid., pp. 2).
The other problem, Komesaroff notes, is that western industry players, so accustomed to viewing events through their ideological blinkers, failed to see the logic and thrust fo Chinese policy, even when it was staring them in the face.
Western industry players have long believed that China’s enormous expansion of aluminum capacity defies economic logic. Aluminum production is one of the most electricity-hungry industries in existence, with energy accounting for 40% of production costs. So many analysts have long argued that it makes no commercial sense for China, a country with relatively high-cost electricity, to produce so much aluminum. Global producers like Alcoa and Rio Tinto have expanded because of their belief that sooner or later economic logic will prevail and Chinese aluminum smelters will start shutting down in droves. But this analysis has proved to be mistaken, because it ignores other sources of cost savings, downplays the adaptability and resourcefulness of Chinese producers, and misunderstands how industrial policy drives China’s decision-making. (Ibid., pp. 2).
Rio Tinto has patented a similar technology, but because it and other Western companies have not made much investment in new capacity they have not been able to incorporate it into actual facilities. As a result, China’s aluminum smelters are operating with the world’s most efficient technology, saving 1 MWh of electricity per ton of aluminum by comparison with global peers. At average power tariffs this is equivalent to a cost saving of RMB500 per ton of aluminum. (Ibid.).
The central government has long been aware of this problem, and issued various orders to shut down the excess, but local governments have found that their interests are better served by ignoring Beijing’s directives. Since local officials are rewarded for their ability to foster local economic growth and maintain social stability, shutting down plants that provide employment and tax revenues is rarely an attractive option for them.(Ibid., 4)
A February report by the Ministry of Industry and Information Technology (MIIT) acknowledged the difficulties in shutting down local facilities, such as a loss of tax revenue that would make it harder for local governments to pay back their debts. Rather than calling for more closures, it urged efforts to help smelters lower power prices and form industry alliances to ride out the slump (Ibid., pp. 4).
Komesaroff ends by suggesting ways in which Western companies might survive in a profitless industry now dominated by the Chinese approach to capacity and public policy driven economic objectives. These focus on joint ventures and aggregated production and production chain alliances on a model similar to that employed by Chinese companies. But the difficulty is that Western companies do not serve national interests directly, as they do in China. Nor do western companies frame thier operations around public policies related to social responsibility within long term projects of economic development. These companies, untethered form the state, now must learn to operate without the benefit of public protection. If they do not develop, functionally at least, some of the aggregating long term objectives now central to Chinese sovereign planning and economic policy, they will likely continue to shrink, especially as critical resource sectors run the risk "that for the foreseeable future there is no money to be made in aluminum smelting." (Ibid., 5).