China Zhongwang's Aleris Deal Threatened By Commerce Investigation

| About: China Zhongwang (CHZHF)

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By Stuart Burns

One Chinese aluminum company above all others seems to have stirred up a controversy in the North American market.

China Zhongwang (OTC:CHZHY) (OTC:CHZHF) has been cited in a Department of Commerce preliminary determination that its shipments into the U.S.A. of aluminum alloy 5050 extrusions were an attempt to circumvent anti-dumping (AD) and countervailing duties (CVD) rulings on 6000 series extrusion alloys, a case that is ongoing.

Now, the firm's proposed $2.3 billion purchase of U.S. aluminum producer Aleris (OTC:ALSD) is embroiled in political objections after senators asked Treasury Secretary Jack Lew to launch a review of the deal.

China Zhongwang Speaks

In an interview with Harriet Lau of China Zhongwang Holdings in Hong Kong, MetalMiner sought the Chinese producer's side of the story. Maybe not surprisingly, Lau refuted claims that China Zhongwang had tried in any way to circumvent AV/CVD regulations by shipping 5050 alloy into the US market.

In an attempt to put some perspective on the situation, Lau advised the firm had shipped only 1500 tons of 5050 alloy to one distributor over a period of two years. Nor was the alloy the one the company normally produced or marketed, but was supplied at the request of the distributor. Out of an annual production of 750,000 metric tons it must be said China Zhongwang wasn't exactly profiting from the trade to any significant extent with the delivery of only 1,500 mt.

Whether the firm realized at the outset that this alloy was an attempt to circumvent AD/CVD duties or whether it was a naïve response to a U.S.-based distributor's intent to do the same is unclear. But the Aluminum Extruders Council, in its petition to Commerce in March, makes a strong case that the supply of 5050 heat-treated extrusions really only makes any sense in the context of avoiding duties because the alloy, in its heat-treated condition, can match the properties of a standard commercial 6000 series extrusion while avoiding high punitive duties.

Otherwise 5050 in the heat-treated condition isn't a logical alloy in which to produce aluminum extrusions, as it offers no advantages over standard 6063, yet the small economies of scale raise the cost of production over that of 6063.

Simple Mistake? Or Something Bigger?

In hindsight, China Zhongwang made a mistake by not responding to the original allegations. Silence in such situations is often seen as an admission of guilt. In the company's defense, Lau said that the firm had made the decision not to respond because the volumes involved were so small the company thought it would blow over.

As if this was not enough, the firm's proposed purchase of Aleris has stirred up a relative hornet's nest of opposition across the spectrum of industry players. Ironically, the only party that seems in favor is Aleris itself, probably figuring a trade buyer would provide more finance, support and long-term commitment than a private equity investor who would be looking for a quick turnaround via cost-cutting.

We covered objections to the purchase in a post back on November 7 and do not propose to add to it here beyond saying much of the objections based on Aleris' strategic position and technologies are hogwash. There is little technology at Aleris or sensitive sales the firm enjoys that would be of any strategic risk in allowing a foreign buyer to see or control.

Indeed, China Zhongwang's attempt to buy the firm is along the same lines as the allegations against it for supplying 5050 alloys: it allows the company access to the vast U.S. 6000 series market, but like a Japanese automaker manufacturing inside the U.S. rather than supplying finished cars from Japan, it gets around import duties.

It is a pity for Aleris, but a boon for those that object to a foreign owner, that the company bidding to buy it is one already embroiled in a highly controversial Commerce case. China Zhongwang's foray into supply of 5050 extrusions have damaged its position for the infinitely more valuable takeover of Aleris, it would be my guess the firm deeply regrets ever getting involved in that trade.

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