The burst of the aluminium bubble in Xinjiang

From ToxicLeaks

Xinjiang Uyghur Autonomous Region, a Chinese province on the Northwest border where the majority of the population is Uyghur, witnessed a large-scale aluminium investment boom since the beginning of 2010. The capacity of Xinjiang’s aluminium production has multiplied by 10 in only 4 years. What has lured Chinese aluminium producers to this region is its rich coal reserves, one of the main reasons for the low cost of electricity, which is one of the most important components in the cost structure of aluminium production. However, the coal-intensive production model has very negatively impacted the environment of Xinjiang. The “mother-river” of Xinjiang, Manasi River, is reported to be heavily polluted, and production plants are built close villages inhabited by the local population without any protection measures. Chinese news reporters have heard lots of significant complaints from the locals infected by the pollution-related diseases.

Even the Chinese government, despite its normally piecemeal efforts at tackling environmental pollution of heavy industry, has made attempts to take action against the endemic pollution in Xinjiang, attemping to pressure the worst polluters to reform and enhance their environmental protection measures. However, attempts have miserably failed: despite the numerous regulations initiated by the Chinese government aimed at restraining the aluminium production capacity increase in Xinjiang, it has remained one of the fastest growing areas of aluminum production in the whole of China. Such negative developments not only illustrate the failure of China’s government to enforce its already flimsy environment policies, but also the utter disregard that China’s polluting industries show for their vast environmental crimes.

However, even with heavily polluting production methods aimed at reducing companies’ production costs, recent developments have shown how the Xinjiang strategy of Chinese aluminium companies is finally beginning to crumble. For example, XinRen Aluminium, a company that has its major production capacity in Xinjiang, was recently delisted from the Singapore stock market, while also issuing company bonds in February 2016. These moves all indicate that this supposedly exemplary Xinjiang focused aluminium company is no longer prospering with the continued use of its cheap and dirty coal electricity strategy.

If we take a closer look at the regional Xinjiang aluminium strategy, we can see that these developments are the inevitable aftermath of the Xinjiang aluminium boom.

Faded cost advantage
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First of all, the remote location of Xinjiang means that transportation costs add up to a substantial amount, eventually compromising the low energy cost advantage of the region. Furthermore, the region’s smelters are only capable of producing primary ingots that have to then be transported to other parts of China to be produced into usable aluminium products. Xinjiang is a remote region that borders on Russia, Kazakhstan and Mongolia etc.; its capital city, Urumqi, is more than 3000 km from Beijing, and railway transportation capacity is always under pressure from various incoming and out-coming resources from other parts of China. Therefore, the transportation cost of Xinjiang’s aluminium, always overlooked by the short-term interest-driven Chinese aluminium companies, adds up and eventually cripples the cost advantage of the region.

Dirty production methods[edit | edit source]

Secondly, and most importantly, the aluminium produced in Xinjiang is environmentally destructive. The Xinjiang aluminium production boom originated from the discovery of coal reserves in the region, which means that Xinjiang aluminium continues to be produced with the dirtiest and most polluting methods, further increasing China’s already disastrous environmental footprint on the planet.

The common production method in Xinjiang is the well-known “Weiqiao model” in which aluminium plants are supported by the self-built electricity plants, which have a greater impact on the environment than central electricity provision, as private companies often lower their environmental standards to secure high profits at the expense of the environmental and the health of the local population.

Environmental Fraud[edit | edit source]

A key question remains: if the Chinese government has been prohibiting the increase of aluminium production capacity since 2013, then how do companies manage to incessantly build polluting production plants? The answer lies in the popular practice of building plants and commencing production with partial or no production permissions, indicating the prevalence of environmental production fraud among China’s heavy industry firms. The majority of the smelters and their related power plants in Xinjiang are non-approved, according to research released in Jan 2016. The report further shows that more than 60% of smelters and 66% of the power plants are operating without complete government approval. The most appalling examples are East Hope Xinjiang with 1200 kt of smelters and 2410 mw of power plants operating without approval, and Hongqiao Group’s 2000 kt non-approved smelters. The two of them are leading Chinese aluminium producers, especially Hongqiao Group, which last year became the world’s largest aluminium producer last year.

In addition to all of the above, Tianshan Aluminium, one of the largest aluminium companies in Xinjiang, has a production license to produce advanced aluminium end products with small environmental impacts, has long been involved in large scale environmental fraud by illegally producing primary aluminium ingots. Chinese reporters went to the production site of Tianshan Aluminium and found out that it is surrounded by stinking river and toxic air. And still not a word from the government.

In summary, if the Chinese government plans to stick to its policy commitment of aluminium production capacity cuts and environmental protection, especially by shutting down outdated and heavily polluting plants, Xinjiang will be the first to be impacted. As examples show, the strategy of Chinese aluminium companies in Xinjiang, which is essentially functioning under the old scheme of trading environmental protections for corporate profit, is soon about to crumble. That will likely result in bankruptcy for these firm if they do not radically change their old methods of production, which have been so heavily damaging to the environment in Xinjiang.