Hongqiao Aluminium – Dirty Dealings, Dirty Numbers, and Dirty Air
Since China Hongqiao began in the aluminium business in December, 2002, the alumina and aluminium business has been under the control of Zhang Shiping, his family, and his partners. After restructuring several times in the interim, the Zhang family divided the businesses between two entities: Shandong Hongqiao and the Chuangye Group. In 2010, upon the advice of counsel, Hongqiao and Chuangye divested themselves of the assets that use bauxite to produce alumina to Gaoxin Aluminum & Power Co Ltd (Gaoxin).
IPO[edit | edit source]
In March 2011, Shandong Hongqiao went public and was listed on the Hong Kong Stock Exchange as China Hongqiao. In Hongqiao’s Initial Public Offering (IPO) Prospectus, recognizing the significant environmental dangers of improper long-term storage of red mud, Hongqiao explained its rationale for divesting their bauxite assets was solely to avoid the environmental risks attendant with the alumina by-product:
Our PRC legal advisors, Zong Heng Law Firm, have advised us that, although there are no national or local environmental protection standards governing the level of red mud created in the production process of alumina, there are certain regulations which govern the manner of storage and disposal of red mud and the measures to prevent pollution caused by red mud, including Regulation on the Prevention of Mine Tailings Pollution promulgated by the State Administration of Environmental Protection, which mainly provides that (i) enterprises which create mine tailings should formulate prevention plans for mine tailings pollution, and adopt effective measures to prevent pollution caused by mine tailings; (ii) enterprises should build mine tailings processing or storage facilities, and mine tailings should be discharged into such mine tailings facilities; and (iii) effective measures on leakage prevention should be adopted for the mine tailings facilities which store dangerous mine tailings.
The incongruence of a sale of substantial alumina assets, although not apparent on the surface, quickly become evident once the firm’s ownership is examined. Gaoxin, whose facilities are adjacent to Hongqiao, has as a majority shareholder the Labor Union Committee of Zouping Economic Zone of Shandong Province, which owns 74.6% of Gaoxin’s shares. In addition, the transaction can scarcely be one conducted at arm’s length, considering both companies share top-level managers. According to a report filed with People's Bank of China (PBC)’s Credit Reference Center, Liu Gang, the Head of Hongqiao’s Overseas Projects, is the Chief Executive Officer of Gaoxin as well.
The Coal Ash Ruse[edit | edit source]
In 2012, Hongqiao announced that it would be building facilities for producing alumina using coal ash. The firm indicated that the facilities in the Zouping Binzhou Beihai Development Zone produced 4 million metric tons of alumina by mid-2014.
However, satellite imagery indicates that the facilities at Binzhou use bauxite, not coal ash. The images clearly indicate the presence of red mud, the toxic by-product of alumina production using bauxite. The reason for continuing to refine bauxite is simple – converting coal ash to alumina is substantially more expensive.
The toxic red mud shown in the pictures is a highly alkaline substance full of oxidized iron, silica, unleached residual aluminum, and titanium oxide. In the event of a loss of containment, which could be caused from something as commonplace and unavoidable as flooding, will spread the toxic substance over a large area. As 1 ton of alumina creates 1.5 tons of red mud, the amount of toxic waste waiting to be released is massive.
The consequences may be especially dire, as Shandong is China’s most significant producer of wine and other agricultural products. An accidental release of Hongqiao’s red mud would rival the Ajka alumina sludge spill in 2010, when an estimated 30 million metric tons of red mud was released over a 15 square mile area in Hungary, killing ten, injuring 150, and costing hundreds of millions of dollars and several years to clean up. The amount of red mud currently stored at Binzhou isn’t known at the present time, but the amount is probably at least as much as was released at Ajka, with 7.8 million metric tons being added each year to the reservoirs at current production rates. As the red mud reservoirs are all surrounded by agricultural land, the economic impact and damage done to the local food supply by the release of even a relatively small amount of the toxic mud could both be catastrophic and long lasting.
The Sweet Deal That Stinks[edit | edit source]
After the sale of Hongqiao’s bauxite-to-alumina business to Gaoxin, the latter agreed to sell alumina to the former at a 20% discount. The reasoning behind the highly favorable terms are, according to Hongqiao, their “long-term commitment, bulk purchase, self-pick-up arrangement and deposit.” In addition, Hongqiao made an advance payment of CN¥400 million to allow Gaoxin to maintain liquidity.
However, the mathematics of the arrangement don’t make sense. Assuming a price of CN¥2,500 per metric ton of alumina, 1 million metric tons, less a twenty percent discount, comes to CN¥500 million. That’s CN¥1 million above the advance payment Hongqiao tendered to Gaoxin for alumina. Although it isn’t uncommon to offer discounts for prepayment in the business realm, a prepayment is scarcely worth a discount of that magnitude.
In addition to the substantial discount at which Hongqiao said it was purchasing alumina from Gaoxin upon the latter’s spin-off, Hongqiao continued purchasing the aluminium precursor for an allegedly steeper discount going forward from there. In the years leading up to their questionable relationship with Gaoxin, Hongqiao was purchasing alumina from Chuangye Group at a slight discount – CN¥390 per metric ton in 2008, and CN¥288 in 2009. In the first nine months of post-spinoff 2010, Hongqiao said it obtained alumina from Gaoxin at a discount of CN¥736 per metric ton, or a 32% discount on average.
The Bottom Line Goes Through the Roof …[edit | edit source]
With a significant drop in overhead due to apparently fake procurement statistics, and free from the burden of dirty bauxite assets, Hongqiao’s bottom line exploded. In 2007, the firm listed a before-tax profit of CN¥1.4 billion; the next year Hongqiao’s profits dipped to CN¥383 million; in the year prior to Gaoxin’s spin-off, Hongqiao cleared CN¥774 million in pre-tax profits. Then, in the first three quarters after the spin-off, Hongqiao’s pre-tax profits were listed as CN¥4 billion – almost fourteen times the pre-tax profits the firm reported for the first three quarters of 2009 (CN¥286 million). Hongqiao reported half again more pre-tax profits in the first nine months after Gaoxin’s spin-off than it did in the three previous years combined.
Now that Hongqiao was (at least on paper) free of the environmental liability of millions of tons of toxic red mud and making money hand over fist (again, mostly on paper), borrowing money became much, much easier. Prior to spin-off, the firm had a maximum unsecured debt to Chinese lenders of CN¥1.5 million. Nine months after the Gaoxin spin-off, Hongqiao’s debt quadrupled to CN¥4.3 million. Allegedly independent Gaoxin got into the leveraging spree as well. As of last month, Gaoxin showed an overall debt of CN¥8.04 billion.
… but the Environment Pays the Price[edit | edit source]
As staggeringly irresponsible the firm’s financial duplicity is, the toll they have taken (and continue to take) on the environment is greater still. Hongqiao increased output by 40% last year to leapfrog Rusal and become the world’s top supplier. In mid-March, China Hongqiao Group Ltd. announced that it would expand capacity even more by up to six million metric tons per annum, or sixteen percent, by the end of the year. At present, Hongqiao’s nameplate capacity is 5.2 million metric tons per annum. As the firm continues to use antiquated and dirty coal-fired energy, they will pump 114.4 million metric tons of CO2 into the atmosphere this year. After announced capacity increases kick in, the amount of CO2 Hongqiao will pollute the air with will be 132 million metric tons per year. The amount of damage to the environment that results from Hongqiao’s improprieties is as yet unmeasured, but there’s little doubt that it will be gargantuan. Now the question that remains is who will take care of the huge amount of toxic red mud accumulated by Gaoxin, considering that Gaoxin transferred all its profits to public company Hongqiao by supplying alumina at a discounted price?