Half of China's aluminum smelters running at a loss

Safety valve

The main safety valve for Chinese smelters remains the leakage of domestic surplus into the international market in the form of semi-manufactured products.

While there is still a 15 percent export tax on primary metal, semi-manufactured products still qualify for value-added tax rebate.

Disconcertingly for non-Chinese producers, such exports have been steadily increasing thanks to the gap between domestic and international prices. December's implied tally from the preliminary figures released on Jan 15 was a fresh all-time high.

And really disconcertingly for non-Chinese producers, it is now widely accepted by analysts that some of this outbound flow is metal that has undergone minimal cosmetic transformation to classify as a "semi" and therefore qualify for the tax rebate.

That means not only are Chinese semis displacing demand for products outside of China, they are partly displacing demand for primary metal as well.

AZ China's Adkins suggests that China may be getting wise to this situation, increasing the level of inspections of outbound cargoes. Simple market forces may also limit growth in Chinese exports to what is an increasingly saturated Asian market.

Those non-Chinese producers still holding the line on production cutbacks can only hope so.

Until then they will be clapping the price higher with only one hand.

The author is a columnist for Reuters.