Questioning business in China

The U.S. copper industry must compete with a business climate in China that is rife with smuggling, bribes and illegal subsidies, according to Smuggling, Bribes and Subsidies: The Copper Industry in China, a paper published by a trade group representing American manufacturers of copper industrial products.

“The policies and practices of the Chinese government have had a destructive impact on world trade, and particularly on the U.S. copper industry,” says Joseph Mayer, president and general counsel of Copper and Brass Fabricators Council. “Chinese government ownership and control, preferential tax treatment, customs fraud, disregard for the global copper market, and currency manipulation are a lethal combination and have unfairly increased the cost of doing business for those of us who practise integrity in such matters.”

The increase in the production of refined copper and semi-fabricated and fabricated copper products in China in recent years has had an unprecedented impact on the global market for the red metal. While the growth of the copper industry in China has, to some extent, reflected the overall growth in the Chinese economy and the nation’s move toward industrialization, it has been fostered and encouraged by the policies of the government of China at both the national and local levels.

First, China’s desire to expand indigenous copper production has resulted in massive increases in Chinese purchases of global copper scrap supplies, primarily in the U.S., because China’s internal production of copper does not meet its own needs. As China has bought an increasing proportion of U.S. supplies of copper scrap, supply shortages and large price spikes have ensued.

Chinese government policies have also provided cost advantages to fabricators of finished copper products and copper alloys in China in procuring their raw materials. These cost advantages, in conjunction with an undervalued Chinese currency, have increasingly been used by Chinese producers to export their fabricated products and undercut prices offered by U.S.-based competitors.

Chinese policies encouraging the development of its copper industry can be grouped under five headings. They are outlined below:

— National and local ownership — While China’s copper industry was largely owned and controlled by one state-run company until the 1990s, that entity was dissolved in anticipation of China’s accession to the World Trade Organization. Although some degree of privatization has occurred, in many instances, national government control of the copper industry has simply been replaced by more localized control by provincial and city governments. Indeed, much of the production of copper cathode and of downstream copper products in China is controlled by companies that are largely owned and controlled by provincial and local governments.

These government-owned copper producers enjoy large cost advantages such as inherited land and facilities, support from provincial governments (including preferential treatment from provincial-owned banks), tax breaks, and little, if any, rent payments. These benefits provide substantial advantages to these companies vis-a-vis American copper producers, which must invest their own capital in land and equipment, pay market rates on capital borrowed, pay local, state and federal taxes, and pay market rates for energy and water and sewer usage.

— Value-added tax refunds — Several large producers of copper-based products in China are known to receive tax incentives from the Chinese government in the form of a 17% value-added tax (VAT) paid on imports of copper ore, concentrate, and copper-based scrap. This refund is designed to allow large producers an opportunity to upgrade their equipment and to encourage copper refining in China.

— Customs fraud — Producers of copper products in China are known to avoid paying proper customs duties on imports of raw materials. This is accomplished through three methods. First, the so-called “tax-package system” amounts to a bribe paid to customs officials, whereby high-grade scrap is deliberately mis-classified as lower-quality material, thus lowering the ad valorem customs duties paid on entry of the merchandise. It is understood that such subterfuge has allowed importers to pay as little as 1% of the customs duties that should be paid.

The second method of duty avoidance is the so-called “lowest-charge” calculation, whereby Chinese customs officials set import values as the lowest value an importer can claim on imported scrap. Originally established as a means of preventing tax evasion, the “lowest values” have become a fallback value to be declared in lieu of the actual value of the merchandise being imported. Indeed, the reduction in lowest values and the willingness to accept customs declarations of import shipments at these rates appear to have been adopted by individual Chinese ports as a competitive technique to attract import traffic and revenues away from other ports in the country.

Finally, research indicates that counterfeit invoices (typically showing lower values for the imported cargo than the true invoices) have been employed by importers in order to avoid payment of both VAT and customs duties on imports of copper raw materials, such as concentrates and copper-based scrap.

— Shanghai Metal Exchange — The Shanghai Metal Exchange handles sales and futures contracts for non-ferrous metals independent of the dominant global metals exchanges (the London Metal Exchange and Comex). Prices for copper cathode on the Shanghai Exchange in recent years have been consistently above those on the LME and Comex. This has encouraged the import and refining of copper concentrate and copper-based scrap in lieu of copper cathode as a raw material input in China. While not a true “benefit” to producers of copper products in China, the maintenance of artificially high prices for copper cathode via the Shanghai Exchange has encouraged the consumption of copper-based scrap in China, thereby distorting global trade and consumption patterns for copper-based scrap.

— Fixed yuan to U.S. dollar exchange rates — The pegging of the Chinese currency, the yuan, to a fixed rate of exchange with the U.S. dollar has encouraged exports of semi-fabricated and fabricated products of copper and copper-alloys from China to the U.S. Owing to the ongoing fixed rate of exchange, it has been estimated that the Chinese currency is undervalued by approximately 40% in relation to the U.S. dollar, which has allowed Chinese producers of downstream copper products to set aggressive prices in the U.S. market. The result has been massive sales losses by U.S. producers of fabricated copper products and a near crippling of the industry.

As the undervalued yuan has led to huge increases in Chinese exports to the U.S., China’s reserves of U.S. dollars have ballooned. Some of these large dollar reserves have been funnelled to the Chinese copper industry, which has used the hard currency in turn to purchase copper-based scrap in the U.S. market and to outbid U.S. producers for this material. Thus, despite the relative weakness of the yuan (which should have acted to discourage Chinese sourcing of U.S. dollar-denominated copper scrap), the Chinese government has used various policies to allow its copper producers to source an ever- increasing portion of its raw materials needs from the U.S. copper scrap market. The result for the U.S. industry has been supply shortages and increased costs for basic raw material.

— The preceding is an edited version of a bulletin published by the Washington, D.C.-based Copper Brass Fabricators Council and the Illinois-based Non-ferrous Founders Society.