Chinese Billionaire Linked to Giant Aluminum Stockpile in Mexican Desert

http://www.wsj.com/articles/chinese-billionaire-linked-to-giant-aluminum-stockpile-in-mexican-desert-1473356054

by nkurz • 10 years ago

234 158 10 years ago

danielvf• 10 years ago

The article mentions that aluminum prices have fallen 50% since 2010. However, prices were double historical normal from 2005 to 2011. The price lowering was just a return to normal prices.

rrggrr3• 10 years ago

This is correct. Three factors drove the bubble in aluminum and other commodities: Increased energy expense, speculative and fraudulent investment, and some increased consumption. However, three factors are likely to continue to drive aluminum and other commodities under the mean: Lack of confidence, spectacular debt burdens and deflationary trends across commodity price inputs. Its likely to be years before a stable mean is established, despite the occasional mirage of stability from month to month.

at-fates-hands• 10 years ago

I remember working at a bike shop around this time and within 6 months all of our bikes went up in price like $50-100. I had no idea what was going on and asked one of corporate office guys what the deal was.

He said between India and China, they had both put huge strains on steel, aluminum and titanium and it was causing a shortage for bike manufacturers, so they were raising their prices since the prices for these metals had skyrocketed in recent months.

Good to know it was a little more to it, but interesting nonetheless.

joe_the_user3• 10 years ago

Indeed, one of the motivations for speculation has been the continuous (electronic) printing of money by the US and other governments (combined with massive infrastructure projects by China), leading many investors to logically-if-naively believe that commodity prices (especially gold) would follow "real" money. The problem is that all commodities are actually produced and consumed and speculation simply causes disproportionate production followed by a crash.

And, of course, there are a number of ways to do speculation in a bear market but altogether, more money is going to be made in a bull market.

Even more, since the money coming out of quantitative easing isn't going into consumer goods (that much), it has to go into speculation and it thus seems likely the various kinds of market imbalances will or get worse.

davesque• 10 years ago

I'm sure this guy will just get a little slap on the wrist.

JoeAltmaier2• 10 years ago

Its not clear he's done anything wrong. Shipping Aluminum to Mexico? What's the problem.

bitchypat• 10 years ago

It is posited that in fact it is clear - in the article no less!

In Mexico, Mr. Shen was implementing an audacious plan, according to people familiar with the matter: A network of trading companies could route hundreds of thousands of tons of aluminum from China to Mexico, where a plant would melt it for shipment to the U.S., evading trade restrictions and claiming North American Free Trade Agreement benefits.

oh_sigh3• 10 years ago

The simple version: If a foreign government is unfairly subsidizing an industry, America will slap a tariff on it. This is good policy - imagine, for example, if Airbus could afford to sell their planes for $1, because they are being entirely subsidized by the French government. Everyone buys airbus, no one buys Boeing any more. Boeing(along with tens of thousands of jobs) goes bye bye, and now Airbus starts selling their planes for whatever they want, because there is no competition left.

So, that's what China was doing - they were giving this aluminum company tons of money, and it allowed them to produce and sell aluminum for far cheaper than should be possible. So America put a tariff on importing that aluminum from China.

Instead, they sent it to Mexico, and then pretended that the aluminum came there when shipping it into America. No more tariffs!

DonHopkins• 10 years ago

They're going to build ladders with it!

CountSessine• 10 years ago

That's what I was thinking. If China wants to subsidize American manufacturing by selling us cheap aluminum, what's the problem? This is is bad if you're part of the tiny American aluminum mining and extraction business, but it's probably pretty fantastic if you're part of the huge and important industries making anything with aluminum, like cars and airplanes.

Why do we want to protect primary industries when historically there's been so much more money in secondary industries?

aab0• 10 years ago

Sounds like he's already been hit where it hurts. If his fortune is ~$3b and the stockpile is ~$6b, then he's losing a ton of money every day to interest and opportunity cost and shipping it back to Vietnam and however much the price has fallen since he bought it all, which could be a large fraction. Given how his partners have the knives out for him, he may not even have that $3b. One can stockpile, but as always, how does one bury the body?

liztsai3• 10 years ago

Heh, well, depends on whether or not the material was hedged in and how much flat price risk he took. He may very well have caught the market at a good time and storage/carry costs in Mexico should be low.

bjfish• 10 years ago

This reminds me of the 2013 Goldman Sachs aluminum story: http://www.nytimes.com/2013/07/21/business/a-shuffle-of-alum...

MrZongle22• 10 years ago

“My Moby-Dick has been Zhongwang,” says Mr. Henderson, president of the Aluminum Extruders Council, a U.S. trade group.

Without context, I would have thought that a Markov text generator was on the loose.

kwhitefoot4• 10 years ago

Really? Why? Mr. Henderson is simply claiming that hist situation bears some similarities to Captain Ahab's. It might or might not really be true but the statement is clear enough for anyone moderately well read in English language literature.

MrZongle22• 10 years ago

It's not that the reference is obtuse (it isn't), it's that one usually doesn't encounter "Moby Dick", "aluminum extruders" and "Zhongwang" in the same sentence. It can give one pause, in the same manner as if the sentence were full of alliteration.

ryanmarsh• 10 years ago

One of the reader comments said: "Extradite him to the US and then prosecute him. Getting rich without any merits is horrible."

and I thought: you must be new here

malchow• 10 years ago

Really? Wouldn't you think U.S. has the lowest proportion of "rich without merits" as %age of rich of any nation in the world – and indeed in history of world?

wskinner• 10 years ago

Not sure why you're getting downvoted. This is a totally valid point. For the downvoters: malchow's claim is that in the US, rich people are more likely to be businessmen or people who have otherwise worked for their wealth, rather than simply having been born to the right parents.

ryandrake• 10 years ago

I would think the opposite in the U.S. Surely most wealth of the top N% (for some small N) is either inherited or enabled by existing family wealth and connections. The rags-to-riches hard worker stories are outliers.

whybroke2• 10 years ago

Given that the US has among the lowest social mobility of developed nations, this is highly unlikely today.

Interestingly, Americans have more belief that their society is a meritocracy than most developed nations and so are especially unaware of the problem. I submit it is this commonly held perception rather than data that is informing you comment.

Obviously in the past, when democracies were even fewer in number, the situation may have been different.

Here[1] you'll find a bounty of links supporting my point were one to take time time to read it rather than instantly and silently down voting what one doesnt want to know.

[1]https://en.wikipedia.org/wiki/Social_mobility#Patterns_of_mo...

microDude• 10 years ago

Now imagine the TPP goes through, how much of a footprint will be exposed to similar practices.

czep• 10 years ago

It's infuriating how these crooks are the ones who get to be rich, while people who play by the rules, work and live honestly, end up being in debt to these criminals.

Nice bit of reporting by WSJ. I'm sure they will also get blocked in China, just like when NYT reported on the massive wealth of Party officials.

In a few years when people ask "when did the war start?" We might be pointing to this very incident, and many others like it.

joe_the_user3• 10 years ago

Which crooks shall we start with first? The Chinese crooks, the American crooks or perhaps crooks of a less powerful third nation?

IE, US brokerages have engaged in similar or even more baldly speculative dodges -

NYTimes: "Hundreds of millions of times a day, thirsty Americans open a can of soda, beer or juice. And every time they do it, they pay a fraction of a penny more because of a shrewd maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars."

http://www.nytimes.com/2013/07/21/business/a-shuffle-of-alum...

And whether any of this actually illegal is to-be-determined but we're dealing with the people who make the laws, fighting with other people who also make their laws, right?

profeta• 10 years ago

the smoking gun graph[0] is missing how much of MX al is sold to the US.

[0] well, they split them into several images http://si.wsj.net/public/resources/images/BN-PS529_201609_G_... http://si.wsj.net/public/resources/images/BN-PS530_201609_G_... http://si.wsj.net/public/resources/images/BN-PS533_201609_G_... http://si.wsj.net/public/resources/images/BN-PT063_201609_G_...

hourislate• 10 years ago

This isn't happening with just Aluminum. All Carbon and Stainless Steel also.

The Chinese have hacked and stolen many of the recipes the Steel Industry has spent decades working on. It was one of the reasons Washington had to act. Now they can supply markets where their product was not within spec.

Chinese industry gets subsidized by the Chinese Government. Depending on the exact industry they get a certain percentage back on exports. It can be up to 20 % on each export dollar. I once spoke to a shop that made specialized tools for CNC and Screw Machines. The guy told me that if he had a robot that could make the tool from start to finish without anyone needing to even come to work. Just place a load of steel down in the shop and leave. When you get back in a weeks time everything will be made and packed. He still couldn't compete with the Chinese. He says their steel is subsidized, their power is subsidized, they get subsidized to export and by the time you take all the subsidies into account they are 20-30 % cheaper than he can even buy the raw material for. Then to avoid any tariffs they ship product all over the world and move it through other countries. Hence Mexico has become one of these countries, especially when it comes to all metals.

They will stop at nothing to destroy Industry in other countries. They have the support of their Government at the highest levels and are encouraged. It is what makes this difficult to police.

lostlogin5• 10 years ago

Nicely said. Crap Chinese still is causing problems here in New Zealand - and I thought we were too far away to matter.

liztsai3• 10 years ago

This is a simple duty arbitrage play.

For anyone wondering what he actually did wrong, there are a few key points to note. Aluminum (and all materials, really) is exported and imported and duties are paid on the basis of the HS code and (if there is a trade agreement to be taken advantage of) certificates of origin (COO) along with the usual shipping docs.

China is inclined to tax exports of primary aluminum because aluminum is power intensive to produce. Thus, exporting raw aluminum ingots whose production has been state subsidized is basically akin to exporting (even giving away!) power. However, China relaxed export duties on certain 'finished' aluminum products. This opened up a loophole where Chinese companies could make 'finished aluminum products' which are classified under a different HS code than primary aluminum and ship it out of the country, duty free. In reality, this meant that they sloppily made it into whatever shape wasn't ingots or T bars rather than into any concretely useful shapes.

These 'finished' products then made their way out to places like Mexico and more recently Vietnam. Since they were still carrying Chinese COOs, they couldn't be directly re-exported to the US (or any other country without a FTA with China). They needed to be remelted/recycled into 'raw aluminum' and given a new COO (or for the less scrupulous given a fake COO...), hence the need for the Mexico factory.

So...if cost to ship to Mexico + cost to extrude and remelt < difference in Chinese VS Western manufacturing costs + duties on primary aluminum ... this is a profitable (and legal) trade!

brandmeyer• 10 years ago

I'm missing the part of this scheme where you need to have a large cache of aluminum in any form to make this work.

Related: The Chinese regulations on export of neodymium magnets is similarly structured. Exporting the magnets or the raw metallic ingredients is subject to high tariffs, but export of finished products using them is not. This isn't just about energy exports though, it's straight up protectionism of their manufacturing businesses.

joe_the_user3• 10 years ago

Well,

If the aluminum they're getting is worth more than they're paying for it, they want to buy and export as much as possible. They then store it until they can sell it at the appropriate price. Especially considering that you'd assume the loophole is going to close sooner or later.

novaleaf• 10 years ago

a guess: in case China closes the loophole.

liztsai3• 10 years ago

If you're taking a protectionist view of their manufacturing business, China relaxing duties on finished goods would make sense. It's unclear (to me anyway) that that decision was made with the intent to spur raw aluminum exports vs some clever guys putting two and two together.

And yes, in case the loophole closes. These guys may have been the largest operation that some guy flew a plane over but they probably weren't the only ones.

cperciva2• 10 years ago

A similar, and perhaps more amusing, situation happened in Canada a few years ago. We have a 245.5% import tariff on cheese (why? Because dairy farmers are more important than poor people, apparently) but there was a much lower tax on "food preparations", including packaged pizza toppings.

So companies would package up "pizza topping kits" in the USA, import them to Canada as "food preparations"... and then remove the cheese, which could be sold separately for far more than the cost of the complete kit.

After a couple years, the classification rules were amended to exclude anything containing cheese from the "food preparations" tariff class.

Kenji2• 10 years ago

I loathe farmer subsidies. I have no idea why our government gives farmers so much money and so many advantages - nobody in our society really benefits from those incredible spendings and it's a significant fraction of our state budget.

gdwatson• 10 years ago

Isn't the whole point of free trade agreements to prevent those sorts of tariffs? Does NAFTA not cover cheese?

tesseract• 10 years ago

This kind of waste seems common and from an outside perspective very frustrating.

There is a famous example where Ford imported cargo vans from Europe to the US with disposable seats in them so they would be taxed (more cheaply) as passenger vans. I think the tax in question was referred to as the "chicken tax".

The situation is a bit different but China's value-added tax scheme combined with the prevalence of factories in bonded export zones leads to a lot of useless shipping of goods (or components of goods) from China to Hong Kong (or another nearby foreign jurisdiction) and back for no good reason other than to avoid tax. I'm sure this works out great for the local freight industry...

wangchow• 10 years ago

Where does one go to learn about such things? Is it economics? Any recommendations? Thanks in advance!

Bakary• 10 years ago

How do people sniff out these deals?

rwmj• 10 years ago

Sounds like the real problem is the power subsidy.

fredgrott• 10 years ago

until the differences in costs of power to re-melt changes..of course that is why more than one country is used..

spectrum1234• 10 years ago

What an awesome article title

awqrre• 10 years ago

At least it's not a giant pile of cocaine I guess... Edit: that was a bit of sarcasm, as these usually don't get reported...

monopolyshit• 10 years ago

Good timing to distract public from Clinton's scandal.

lostlogin5• 10 years ago

Are you referring to the one which she has been cleared of pretty comprehensively? I can't stand her but the faux email scandal is tiresome.

known• 10 years ago

What's wrong with it? https://en.wikipedia.org/wiki/Global_strategic_petroleum_res...

Chinese Billionaire Linked to Giant Aluminum Stockpile in Mexican Desert

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