Helter Skelter Smelter Welter – The Chaos of China’s Aluminium Permitting Regime
According to data obtained from sources within the People’s Republic of China, a significant percentage of domestic aluminium smelting capacity has been built without the proper government permits. The available data is for the far western provinces of Xinjiang and Inner Mongolia, but, according to public statements by government officials, there is strong reason to believe the illicit construction of aluminium smelting capacity occurs across the entire country.
The problem of corruption is ubiquitous in China. One could even say that it’s woven into the fabric of the Chinese society – even in death a Chinese person cannot escape it. A longstanding custom for honoring the recently departed and preparing them for the afterlife is sending them into the great beyond with cash for bribing the Chinese version of St. Peter at the Chinese Pearly Gates. Many businesses have discovered that, without properly greasing the appropriate palms, business deals are doomed to failure. In 2016 alone, Las Vegas Sands, Novartis AG, Qualcomm, PTC, and SciClone Pharmaceuticals have been caught up in Foreign Corrupt Practices Act enforcements by the Securites and Exchange Commission in their dealings with China.
Although corruption has significant moral hazards, illegally building capacity poses a clear danger to the environment as well. Coal-fired aluminium production (which is the process used in the vast majority of China’s smelters) releases 22 tons of CO2 into the atmosphere per ton of aluminium smelted. According to the data on hand, off-books smelters release 74.8 million metric tons of the greenhouse gas into the atmosphere per year in Xinjiang alone – more than Greece, Austria, Finland, Norway, or Sweden release individually on a yearly basis.
The Xinjiang Uyghur Autonomous Region is considered the hinterland by many Chinese, within reach of Beijing but outside its grasp. Ürümqi, Xinjiang’s capitol city, is 1,500 miles from Beijing as the crow flies, which translates to a one day, sixteen hour trip by train between the two cities. As a result, the enforcement of Beijing’s edicts isn’t always what it should be. As of January, and out of 5,630 thousand metric tons of the province’s capacity, fully two-thirds of it lacks appropriate permits for conducting business – 2,230 thousand metric tons is properly permitted, but 3,400 thousand metric tons is not.
Frequently smelters are filed with local government representatives and provide data on their projects, but the capacity itself and the associated power plants have not been formally approved. East Hope Xinjiang (1,200 kt), Shenhuo Xinjiang (820 kt), Qiya Xinjiang (880 kt), Tianshan (1100 kt) and Jiarun Resources (600 kt) all have approvals on file and are running normally. However, as of January, the added capacity has received no formal government approval to go forward with production. Additionally, all of the smelters listed above built captive power blocks with a total capacity of 8 GW, which have also not been approved.
The Inner Mongolia Autonomous Region’s geology makes it a prime location for mining. Its 457,000 square mile breadth makes it twice the size of Texas, and its low population density of 52 people per square mile make it difficult to properly police. As of July of last year, 1,717 thousand metric tons of aluminium smelting capacity was operating without the proper permits in place, which is roughly half of the province’s 3,510 metric tons of smelting capacity. A single smelter, namely Baotou East Hope’s 880-kt plant, had all necessary permits in place prior to last July. Likewise for Huomei Hongjun’s smelter – some permits were in place for its capacity, but it lacked approval for 560 kt added later. Huolinhe Coal-Electricity Group’s 173-kt operation, Datang Electricity’s 287-kt plant, and Jinlian Aluminum Company’s 800-kt smelter all operated without an official stamp of approval.
In July of last year, the regional National Development and Reform Commission of the People's Republic of China (NDRC) for Inner Mongolia approached the central NDRC in Beijing and obtained a blanket approval for all previously unpermitted capacity in the province. Overnight, and wholly without the appropriate due diligence being carried out, almost two million metric tons of capacity were suddenly operating on an above-board basis, whether running cleanly and safely or not.
Such is the situation in just two of China’s twenty-two provinces. There is little reason to believe that these two provinces are exceptions. According to sources, Hongqiao Group, the world’s biggest aluminium producer, hasn’t obtained official approval for any of the 2,200 thousand metric tons of capacity it has built since 2013 in the eastern province of Shandong. Even the government readily admits the staggering nature of the problem. In June 2013, China’s Deputy Director General, Ministry of Industry and IT Luo Tiejun estimated that over 85% of newly-constructed Chinese aluminium smelters were operating without vital build permits.
With the numbers of unregulated, improperly constructed, and unpermitted aluminium capacity seen above, the irreparable damage being done on a daily basis to the environment is certainly gargantuan. Coupled with the naked ambivalence of the powers that be in China, the odds of this situation improving soon are vanishingly small.