One of the world’s largest aluminum extruders is on the defense after a recent report accused it of committing “the largest and most complex China fraud ever uncovered.”
In a scathing 51-page report released last week, short seller Dupre Analytics alleges China Zhongwang Holdings Ltd. chairman Liu Zhongtian and his family have constructed a “network of proxies and intermediaries outside of China, and used them to secretly set up entities and aluminum processing facilities that span the globe.”
The report accuses Liu of inflating Zhongwang’s sales over the past four years by shipping out semi-finished aluminum products from China to companies Liu and people close to him control overseas, where the material was allegedly reprocessed back into aluminum billet and sold again.
“It’s like taking a new car, melting it down, and selling it as steel,” Dupre said.
Zhongwang, which has a market capitalization of $2.3 billion (HK$18 billion), said in a filing to the Hong Kong Stock Exchange that the allegations were “groundless or untrue,” but the company suspended its share trading Friday. According to Reuters, the company is preparing a point-by-point response but hasn’t given a timeframe as to when it will be released.
Zhongwang will have a lot of answering to do regarding the very detailed report, which outlines an alleged scheme in which “Chairman Liu and his family systematically defrauded investors, fabricating at least 62.5 [percent] of revenue since 2011 and likely skimming billions of [capital expenditure] from the delayed facility in Tianjin.”
“We take you on a tour of the Lius’ secretly controlled aluminum reprocessing plants in Vietnam and Mexico where fraudulently obtained Zhongwang aluminum is reprocessed into billet,” the report, which can be downloaded in full here, reads.
Dupre’s report contains photographs it asserts show the Mexico facility, as well as other images its own investigators took in tracking the aluminum from China to its destination.
“The nice thing about Zhongwang is that if investors bought plane tickets today to verify our report, there’s no way the Lius will be able to cover their tracks and get rid of these stockpiles quickly,” Dupre said. According to the report, in addition to other locations, “a substantial amount of [the aluminum] has been stockpiled in two warehouses in California for years.”
The Aluminum Extruders Council (AEC) last week called on the governments of China, Vietnam, Malaysia, Mexico and the United States to investigate the charges against Zhongwang.
“If proven to be true, these allegations make it clear that Zhongwang investment and penetration into North American and Asian markets has been built on a house of cards,” says Jeff Henderson, director of operations at AEC. “Our industry has read about and seen the pictures of the one and a half billion pounds of extrusions that were shipped into Mexico only to be re-melted into billet. That program never made economic sense to anyone in the industry. How can it be profitable to convert ingot into billet, then extrude it, then ship it across the Pacific Ocean to Mexico only to re-melt into billet again?”
In Mexico, specifically, Dupre claims Liu’s re-melting facility has imported $2.1 billion (HK$16.3 billion) of Zhongwang’s aluminum products since 2011 and turned them into aluminum billets, yet he has only been able to sell approximately $0.97 billion (HK$7.5 billion) worth over three years.
“Many speculated about how and why such a program would work,” says Henderson. “Now, we read Dupre’s allegations detailing a level of deception and fraud that no one could have ever imagined. Furthermore, we learn in this report that the Mexican operation is just one of many such programs.”
Zhongwang was one of the companies named in the U.S. investigation of the dumping of Chinese extruded aluminum in 2011, which prompted duties to be imposed on the material’s importation. Since then, at least two related transshipment cases have surfaced.
With a reported significant increase in Chinese aluminum exports from China, decreased prices in the market and more extrusions coming into the U.S., Henderson says U.S. manufacturers importing extrusions need to be diligent in confirming that what they’re purchasing is actually coming from where the seller says it’s coming from, as buyers could still be held accountable for their involvement in the “schemes” despite being given false information.