Chinese Billionaire Linked to Giant Aluminum Stockpile in Mexican Desert Chinese Billionaire Linked to Giant Aluminum Stockpile in Mexican Desert
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Chinese Billionaire Linked to Giant Aluminum Stockpile in Mexican Desert Chinese Billionaire Linked to Giant Aluminum Stockpile in Mexican Desert U.S. aluminum executives claim Liu Zhongtian, founder of Chinese metals conglomerate China Zhongwang, used a factory in Mexico to game the global trade system An aerial view of the aluminum stockpile around Aluminicaste Fundición de México’s San José Iturbide plant in June 2016. PHOTO: MIKE RAPPORT By SCOTT PATTERSON in Los Angeles, JOHN W. MILLER in San José Iturbide, Mexico and CHUIN-WEI YAP in Liaoning, China Updated Sept. 8, 2016 1:46 p.m. ET 63 COMMENTS Two years ago, a California aluminum executive commissioned a pilot to fly over the Mexican town of San José Iturbide, at the foot of the Sierra Gorda mountains, and snap aerial photos of a remote desert factory. He made a startling discovery. Nearly one million metric tons of aluminum sat neatly stacked behind a fortress of barbed-wire fences. The stockpile, worth some $2 billion and representing roughly 6% of the world’s total inventory—enough to churn out 2.2 million Ford F-150s or 77 billion beer cans —quickly became an obsession for the U.S. aluminum industry. Now it is a new source of tension in U.S.-Chinese trade relations. U.S. executives contend that the mysterious cache was part of a brazen scheme by one of China’s richest men to game the global trade system. Liu Zhongtian, chairman of China Zhongwang Holdings Ltd., toasts the company’s share listing in Hong Kong on May 8, 2009. PHOTO:IMAGINECHINA/ZUMA PRESS Aluminum-industry representative Jeff Henderson says he is convinced that China Zhongwang Holdings Ltd., a Chinese aluminum giant controlled by billionaire Liu Zhongtian, tried to evade U.S. tariffs by routing aluminum through Mexico to disguise its origins, a tactic known as transshipping. “My Moby-Dick has been Zhongwang,” says Mr. Henderson, president of the Aluminum Extruders Council, a U.S. trade group. Mr. Liu, a member of China’s ruling Communist Party, denies any connection to the Mexican aluminum or transshipping. “These things have nothing to do with me,” he said in a June interview at his company’s Liaoning, China, plant, where he lives in an apartment inside the factory. He said he wouldn’t know how to establish a business in Mexico, joking that “in that sort of place, there are a lot of killers with guns.” Company records, trade documents and legal filings reviewed by The Wall Street Journal, along with interviews of people who have done business with Mr. Liu, raise doubts about his account. They show that hundreds of thousands of tons of aluminum were shipped to Mexico from China through a series of companies, including one owned by Mr. Liu’s son and one by someone who describes himself as a longtime business associate of the Chinese billionaire. The U.S. Commerce Department says it is investigating the Mexican aluminum’s origin as part of a slew of trade complaints by the U.S. metals industry against China, many of which include allegations of transshipping. China’s booming industrial production has reordered global markets, few more dramatically than aluminum. Fueled by access to inexpensive electricity and tax breaks, Chinese aluminum output doubled between 2010 and 2015. With local demand slowing,more of it was sent to the U.S., which was importing 40% of its aluminum by 2015—up from only 14% in 2010. By the end of 2016, only five aluminum smelters will be operating in the U.S., down from 23 in 2000. Alcoa Inc., the largest American aluminum maker, is splitting in two, isolating its profitable parts- making units from its troubled raw-aluminum operations. Alcoa Chief Executive Klaus Kleinfeld last year said illegitimate Chinese exports were “the major driver” of lower aluminum prices. Mr. Liu’s ascent as an aluminum mogul began in 1993, when he started building his company from a small domestic player in northeast China into one of the world’s top producers. China Zhongwang’s main business is making aluminum “extrusions”—pipes, rods and panels used in finished products such as window frames, refrigerators and automobiles. Extrusions are formed by forcing heat-treated aluminum through a die, like dough through a cookie cutter. He took China Zhongwang public in Hong Kong in May 2009, retaining a 74% stake while he raised $1.26 billion in one of the world’s biggest initial public offerings of the year. While a nearly 50% decline in China Zhongwang’s stock since the IPO has cut into Mr. Liu’s fortune, he remains among China’s wealthiest businessmen, with a net worth estimated by Forbes magazine at around $3 billion. The same year, Chinese aluminum-extrusion exports to the U.S. more than doubled from 2008 to 192,000 tons. U.S. prices for imported extrusions plunged 30% from the previous year, according to Global Trade Information Services, or GTIS, which tracks world-wide trade. The burst of exports led to a finding by the Commerce Department that several companies, including affiliates of China Zhongwang, were selling cut-rate aluminum while receiving subsidies back home. In 2010, it slapped punishing tariffs on certain aluminum imports, including those from what it dubbed the “Zhongwang Group Companies.” China Zhongwang’s U.S. shipments ground to a halt, and its 2010 profits fell 26% from the previous year. The company never responded to the U.S. government’s questions about its trade practices, the Commerce Department said. It also didn’t respond to several requests for comment about the matter for this article. Around this time, an ambitious young businessman, Po-Chi “Eric” Shen, a native of Singapore who had attended the University of California at Berkeley, began shopping for real estate in Mexico. He settled on a plot near San José Iturbide, about 160 miles northwest of Mexico City and about 500 miles from the U.S. border at Brownsville, Texas. There, a company Mr. Shen helped establish, Aluminicaste Fundición de México, developed plans to construct a $200 million factory to melt aluminum into raw metal. Po-Chi ‘Eric’ Shen answers a question during a public hearing about an aluminum project he was advocating in Barstow, Calif., in April 2015.PHOTO: MIKE LAMB/DESERT DISPATCH Mr. Shen had a history with the Liu clan. He was friends with Mr. Liu’s son, Liu Zuopeng, known as ZP, who lived in Southern California, where the Liu family owns several houses. Mr. Liu’s wife became a board member of one of his companies, Scuderia Development, corporate records show. Another of Mr. Shen’s companies, Scuderia Capital, in 2008 had lent China Zhongwang $200 million, according to China Zhongwang’s prospectus. In Mexico, Mr. Shen was implementing an audacious plan, according to people familiar with the matter: A network of trading companies could route hundreds of thousands of tons of aluminum from China to Mexico, where a plant would melt it for shipment to the U.S., evading trade restrictions and claiming North American Free Trade Agreement benefits. In an interview, Mr. Liu said he wasn’t involved in Aluminicaste and didn’t help Mr. Shen finance the plant. “I don’t even know him very well, why would I give him money?” he said. Mr. Shen, in several interviews with the Journal, described extensive and longstanding business ties with Mr. Liu and his family. “Mr. Liu and I had a very complicated business relationship that was neither employer or employee, nor investor or investee,” he said. On paper, China Zhongwang’s days of relying on overseas sales were over. Its 2011 annual report said 96% of its revenue derived from sales inside China, up from 56% in 2010. In fact, Chinese trading firms that bought aluminum from China Zhongwang resold much of the product to a commodity trader in Singapore called GT88 Capital, according to shipping records and people familiar with the matter. The owner of GT88: Aluminicaste’s Mr. Shen. In 2011 and 2012, Mexico’s aluminum-extrusion imports surged. Most of the metal was delivered by Mr. Shen’s Singapore trading firm to Aluminicaste’s logistics company, according to shipping records tracked by Panjiva Inc., a New York trade-data company. Rumors of the facility, and the giant stockpile, began circulating among U.S. producers. “No one really knew what was going on,” said the executive who commissioned the aerial photos of the plant, Mike Rapport, who runs an aluminum-extrusion company in southern California. In 2013, Aluminicaste ownership transferred to Mr. Liu’s son, who became CEO of the facility, Mexican corporate records show. Mr. Liu says he wasn’t a party to any of this. He says he “scolded” his son when he found out he had taken over Aluminicaste. “In this matter, I have not helped him,” he said in an interview. “I was very dissatisfied. I told him, if you want to do this line of work, you come back home.” The younger Mr. Liu didn’t respond to multiple requests for comment. Mr. Shen set up shop in an upscale Dallas office employees dubbed the “Sugar Building,” after a film studio that formerly owned it. It sported a pair of executive suites, one of which had a $100,000 bed, according to a former employee. He also snapped up expensive houses, rare cars and a Gulfstream private jet worth $10 million, records in a Dallas county court case show. He purchased a 1963 Ferrari valued at $32 million—one of the highest prices ever paid for a car at the time—and more than $70 million of rare red diamonds, according to the court records.