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China imported more aluminum than it exported in July.

This is a very rare phenomenon. China, after all, is the world’s largest producer of the light metal, accounting for 57% of global output in the same month, according to the International Aluminium Institute.

It is normally a huge exporter of semi-manufactured products (“semis”) - around 5.2 million tonnes in both 2018 and 2019 - with no need to call on extra supply from the international market.

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The last time China turned net importer was in 2009.

Now, as then, the inversion in trade flows speaks to the disconnect between a Chinese market that is in full recovery mode and the rest of the world that is struggling to get back on its feet.

Most expect this import surge to be short-lived, as it was in 2009, but the world has changed since then and it’s possible we’re also seeing underlying structural shifts in the aluminum market.


China imported 123,000 tonnes of primary aluminum in June and another 185,000 tonnes in July. The two-month count already exceeds every yearly total since 2013 and most analysts think there is more to come.

What’s sucking this metal into China is an open arbitrage window between elevated Shanghai Futures Exchange (ShFE) prices and a lagging London Metal Exchange (LME).

The cash arbitrage between the two contracts flexed out to a seven-year high above 2,000 yuan per tonne at one stage in July.

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Aluminum prices in both markets troughed in March but the Shanghai market has led the recovery, consistently outperforming the LME price.

To some extent this simply reflects China’s resurgent manufacturing sector, which is benefiting from a more metals-heavy infrastructure boost than was widely expected.

It’s why China’s copper imports are also booming and why the country’s steel production is running so strongly right now.

In the case of aluminum, though, recovery exuberance has been complemented by physical disruption in the country’s complex supply chains.

China’s first-quarter lockdown seems to have opened up supply gaps for specific products, particularly some forms of primary metal. Local producers, meanwhile, seem to have responded to the first-quarter price collapse by stopping sales and accumulating stocks, helped by local governments’ sudden enthusiasm for building “strategic” reserves.

It’s noticeable that the Shanghai contract remains fully backwardated along the forward curve, the cash premium still signaling availability issues.

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However, the arbitrage window with London is now closing, which should mean these primary metal imports abate after a month or so of catch-up physical shipments.

The same, though, may not hold true of another sort of aluminum that is being imported.


Imports of unwrought aluminum alloy have also surged over the past few months. Indeed, the June-July tally of 302,000 tonnes is unprecedented, even during the financial crisis.

The gaping arbitrage window is also a prime driver of this flood but the current deluge masks an underlying change of trade pattern.

China has historically exported more alloy than it has imported. Alloy is a product generated from scrap metal and used mainly for die-cast parts in vehicles, which means trade flows have largely been shaped by Asian automotive companies’ off-shoring in China.

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However, China turned a net importer of alloy in December last year, well before COVID-19 and the London-Shanghai price disconnect.

Net alloy imports so far this year are running at 524,000 tonnes. The last year China imported more alloy than it exported was in 2005 and the net total was just 27,000 tonnes.

This suggests something more than simple arbitrage is at work.

It’s noticeable that China’s top alloy suppliers are Malaysia, South Korea and India. All three countries have become major destinations for aluminum scrap that doesn’t meet China’s increasingly stringent import purity thresholds

U.S. scrap exports to China slumped from 831,000 tonnes in 2017 to 315,000 tonnes last year but shipments to those three Asian destinations rose from 312,000 tonnes to 833,000 tonnes over the same period.

A new off-shoring business, taking lower-grade scrap and re-melting it into alloy, appears to be emerging.

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Something very similar has been taking place in the copper sector and in both cases the root cause is China’s clampdown on lower grade scrap.

While the country is sucking in other forms of aluminum, scrap imports so far this year are running 51% lower than in 2019. A new system for imports of higher grade material is pending but it may be redundant if global scrap flows permanently re-adjust.

Higher-than-historical alloy import rates may be here to stay, even if not at the current arbitrage-inflated levels.


The flip side to these higher imports is the simultaneous decline in China’s exports.

Exports of all forms of aluminum have fallen 20% so far this year. Shipments of “semis,” the largest component of China’s exports, fell by 16% to 2.6 million tonnes in January-July.

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This is to be expected given the drop-off in demand in the world outside of China, particularly in aluminum intensive sectors such as automotive and aerospace.

Exports should pick up again once demand comes back, particularly since Chinese smelters are ramping up production to benefit from the Shanghai price rebound.

But China’s export markets are also being disrupted by proliferating anti-dumping duties.

The decision by Zhongwang Holdings, the world’s second-largest producer of aluminum extrusions, to scale back its European office may have been due to the pandemic but, as one employee posted on social media, new anti-dumping investigations on Chinese products played a part too.

Lacking co-ordinated international action to tackle China’s history of oversupply and massive exports, ever more countries are erecting barriers to Chinese products.

This trend seems set to harden amid talk of carbon borders, a further potential tariff barrier for China’s coal-hungry aluminum sector.


China’s once-in-a-decade aluminum trade inversion is first and foremost down to the arbitrage window that opened in the second quarter.

That was a market disconnect between Shanghai exuberance and London caution.

But more profound realignments are taking place at the scrap and alloy section of the global supply chain. Meanwhile, the de-globalization trend is still building with China and its dominance of metals such as aluminum center stage.

The current disconnect in China’s aluminum trade may soon pass but there are potentially bigger ones still building.

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