The glut of cheap solar panels manufactured in China has largely been considered to be a boon for the solar industry in North America. Who wouldn¡¯t want hugely subsidized solar panels? But, if the chaos derailing the global aluminum industry is any indication, the long-term consequences of China¡¯s solar manufacturing overcapacity are likely to be far less palatable than the short term consequences.

In 2000, China produced only about 11% of the world¡¯s primary aluminum. Now, it produces more than half. This historically unprecedented expansion of production capacity resulted from government policies rather than process improvements or lower input costs. In fact, of the 50 highest-cost aluminum smelters in the world, 37 are located in China.

China¡¯s government has been subsidizing aluminum smelters through direct grants, interest free loans and other ¡°incentive¡± mechanisms. Absent this massive support scheme, a significant number of the smelters in China would have been forced to declare bankruptcy. Ironically, Chinese smelters often have above average operating costs compared to smelters located outside of China, primarily because of high energy costs.

Energy is the largest component of production costs and accounts for roughly 40% of total costs. The Chinese government has bankrolled its aluminum industry by subsidizing energy, which has kept high-cost smelters in business despite falling aluminum prices.

¡°Strong Chinese government support for its domestic aluminum sector has created vast overproduction, lowering global prices and squeezing the profitability of U.S. aluminum firms,¡± according to an analysis released in November by the U.S.-China Economic and Security Review Commission. ¡°While the U.S. and other global aluminum firms are restructuring and cutting back production to minimize financial losses, the Chinese government is stepping in to expand capacity and encourage exports, placing the entire U.S. aluminum smelting system at risk.¡±

Aluminum smelters in China are especially hemorrhaging cash. In the third quarter of 2015, the consulting firm AZ China found that over 90% of China¡¯s aluminum capacity is ¡°under water on a cash cost basis.¡±

While under normal circumstances such losses would encourage firms to shut down capacity, ¡°in China, production growth and demand growth are completely divorced,¡± according to Uday Patel, a senior analyst at Wood Mackenzie.

By contrast, many of the world¡¯s largest aluminum producers outside of China have curtailed production dramatically to stanch the financial bleeding. In the U.S., nearly one third of the total aluminum production capacity has either been idled temporarily or permanently shut down. Although total U.S. aluminum output is currently at the lowest level since the 1950s, aluminum imports from China have increased by 181% between 2012 through 2015, according to the Aluminum Association.

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