LONDON, Jan 16 (Reuters) - The gloves have just come off in the simmering dispute between the United States and China about that country's rising exports of aluminium.
The United States last week launched a formal complaint at the World Trade Organization (WTO), taking aim at China's "subsidies to certain producers of primary aluminum".
Such subsidies, the United States claims, have "artificially" increased China's capacity, production and market share leading to depressed prices and causing "serious prejudice" to U.S. interests.
This dispute has been brewing for a long time.
The United States was once one of the world's largest producers with 22 aluminium smelters. The number of operating plants has dwindled from 14 in 2011 to just five now.
China, meanwhile, has lifted its share of global production from 25 percent 10 years ago to over 50 percent today.
That parts of China's giant aluminium sector are subsidized is not news to anyone involved in the aluminium market.
But China is not the only country offering subsidies to its smelters and the problem, if there is one, is arguably not at the primary metal stage of the supply chain but further downstream.
Graphic on global aluminium production; China and the rest of the world: http://tmsnrt.rs/2iy2wuQ
SUBSIDIES - A DOUBLE-EDGED SWORD?
The WTO complaint specifically accuses China of providing "artificially cheap loans from banks and (...) artificially low-priced inputs for aluminium production, such as coal, electricity, and alumina."
Some of those targets look a little off the mark. It's questionable, for example, as to whether Chinese smelters are really getting their alumina at below-market prices.
But you don't have to look very hard to see Beijing's influence over parts of the country's aluminium sector.
Chalco, the state-backed producer, recognised 1,769 million yuan (equivalent to $256 million at today's exchange rate) of government grants as income for the financial year to December 2015. The funds were "necessary to compensate costs and facilitate the group's development".
Behind that headline figure, moreover, lay a web of transactions ranging from asset swaps to lease arrangements with the state entity, Chinalco, that is the company's largest shareholder.
This is indicative of one of the core problems with China's aluminium smelter sector.
While a new generation of smelters, mostly located in the northwestern province of Xinjiang, are widely believed to be among the most competitive in the world, older, higher-cost plants such as those operated by Chalco have been kept alive by both central and regional governments.
Paul Adkins, founder of the AZ China consultancy, estimates that six or seven Chinese provinces offer rebates on electricity to some smelters in their jurisdictions.
But they're not the only ones doing so to support financially challenged smelters.
One of those five smelters still operating in the United States, Alcoa's Massena West, is only producing metal thanks to subsidies by the state of New York.
In November 2015 the state's power authority committed $30 million in power assistance and its Economic Development Commission $38.8 million in capital and operating funds to modernise the plant.
And right now Alcoa is in talks with both the Australian government and the state government of Victoria aimed at securing financial support to keep open the 30-year old Portland smelter.
Accusing China of providing subsidies via power rebates may prove something of a double-edged sword for the United States.
China, meanwhile, is no longer a significant exporter of primary aluminium.
That changed around 2006. Primary exports totalled over a million tonnes in 2004 and 2005. By 2015 exports had fallen to 30,000 tonnes and in the first 11 months of last year the total was just 17,000 tonnes.
Rather, the country's export profile is now in the form of semi-manufactured products, 4.2 million tonnes of them in 2015.
True, there are legitimate concerns as to whether some of this outbound flow has really been "product" or metal transformed just enough to bypass the country's export duty on primary metal.
The issue of "fake" semis certainly warrants a conversation between the United States and China, not least because it disadvantages both.
But most of what leaves China is "real" product and if over-capacity is the problem, it's located in the semi-manufacturing part of the supply chain.
As AZ China's Adkins notes, "some of that over-capacity is supported by government policy" in the form of "zero land tax, help with labour costs or local taxes, and the formation of industrial zones with attractive benefits."
However, he goes on to suggest that "the natural structure of aluminum prices in China lends itself to a lower semi-fabricated cost".
A VAT rebate on exports of "product" of course helps but, again, China isn't the only country using that sort of tax instrument to promote value-added output.
Adkins' view is that relative to other countries, the "additional" help offered to the semi-manufacturing sector by the Chinese government is "minimal".
COMPETITIVE?
The United States in announcing its complaint noted pointedly that it has filed 25 complaints with the WTO since President Obama was inaugurated in 2009 and has so far won all those so far announced.
This one, however, may yet prove trickier.
And even if successful, will it really mean a revival of the country's smelter sector?
"When American aluminum workers and producers can compete on a level playing field, they will outcompete any other workers in the world," according to Representative Dave Loebsack (D-IA), one of the backers of the WTO action.
That's questionable, given the age and cost structure of many U.S. smelters relative to the new capacity coming on line in China.
And which workers in particular?
Because there are more American workers employed in the manufacturing part than in the raw production part of the aluminium supply chain.
They may not welcome their own government's attempt to stem the flow of low-cost Chinese semi-manufactured product upon which they and so many other product makers around the world now rely on.
