DELAIR, N.J.—The U.S. Commerce Department is investigating
whether thousands of tons of aluminum at a factory in a
Philadelphia suburb are part of an alleged scheme by a Chinese
billionaire to evade tariffs by disguising the metal as pallets and
then remelting them for other uses.
The probe is part of a broader Commerce Department investigation
into metals magnate Liu Zhongtian and his company, China Zhongwang
Holdings Ltd., among the world's largest aluminum manufacturers,
according to federal documents and a department spokesman.
Mr. Liu and China Zhongwang were subjects of a Wall Street
Journal article last week detailing allegations that firms linked
to Mr. Liu tried to disguise the Chinese origin of large quantities
of aluminum and avoid American tariffs by routing it through
Mexico. Mr. Liu denied any connection to metal stockpiled in
Mexico, which people familiar with the matter say once reached
nearly a million metric tons, or enough to make 77 billion beer
cans.
The Commerce Department is investigating whether a New Jersey
company called Aluminum Shapes LLC became a separate route for Mr.
Liu to evade tariffs, a spokesman confirmed.
Aluminum Shapes said it hasn't violated any trade rules. A
spokesman said the company doesn't own the thousands of tons of
Chinese-made aluminum pallets warehoused at its facilities and
merely charged storage fees to the owner, who the spokesman says is
a former Aluminum Shapes executive. A company spokesman said the
metal was marketed for use as pallets, not to be remelted, though
none of it has been sold.
A U.S. trade group has alleged to the Commerce Department that
the pallets at Aluminum Shapes were imported as a way of
circumventing tariffs on so-called extrusions, products made by
heating and squeezing aluminum into shapes such as pipes and
construction beams. Pallets, made by welding multiple extrusions
together, aren't on the Commerce Department's list of penalized
items.
The Commerce Department in 2010 punished China Zhongwang and
other Chinese producers with tariffs as high as 374.15% after
finding they were receiving illegal subsidies, and also dumping, or
selling products below market prices. Typical tariffs on other
aluminum products, including pallets, are about 5%. Aluminum Shapes
said the pallets it stored were subject to duties of 2.68%.
Importing so many pallets was unusual, aluminum-industry
officials say. Aluminum pallets fill a niche in the U.S., limited
to "specialized uses" like the relatively small airfreight market,
says Dick Evans, the former chief executive of aluminum maker Alcan
Inc. The pallets at Aluminum Shapes are also several times heavier
than similar ones on the market—a key issue because pallets are
supposed to be light to save on shipping costs.
A China Zhongwang spokeswoman said pallets manufactured by
Zhongwang "are not under the scope of anti-dumping rules.
Therefore, there is no such situation as circumventing tariffs."
She added that Zhongwang doesn't have a business relationship with
Aluminum Shapes.
In an interview in China, Mr. Liu said he isn't trying to send
aluminum into the U.S. and that he has no business interest in
Aluminum Shapes.
An Aluminum Shapes spokesman said the owner is removing the
metal from its warehouse following the Journal's coverage of China
Zhongwang. The spokesman didn't say where it was going but said it
would take days to move all of it.
Inexpensive metal from China has driven down prices in the U.S.,
slamming American producers who say some of the imports skirt trade
laws. U.S. steelmakers are struggling, and Alcoa Inc., the U.S.'s
biggest aluminum producer, is preparing to split in two after its
raw aluminum business suffered under pressure from less-expensive
imports.
Commerce began investigating the Aluminum Shapes stockpile after
the Aluminum Extruders Council, a trade group, complained in 2015,
according to public documents and a department spokesman.
U.S. Customs and Border Protection examined the Shapes pallets
in 2015 and decided they complied with U.S. laws, according to a
Customs letter Shapes provided to the Journal. Commerce
subsequently opened its own probe into the pallets.
The connections between China Zhongwang and Aluminum Shapes date
back to 2011. A company run by Johnson Shao, whom Mr. Liu described
as China Zhongwang's U.S. retail agent, offered to sell pallets
stockpiled in California to the New Jersey company to melt down,
says a person involved in the talks. The New Jersey company's
executives traveled to China and met Mr. Liu at his Liaoning plant,
according to a photograph and news release on China Zhongwang's
website. A China Zhongwang spokeswoman said many of the company's
peers visit the factory each year.
About a year later, Aluminum Shapes was bought by Global
Aluminum, a company run by Mr. Shao. The deal was for about $50
million, completed through wire transfers from Mr. Shao's account
to Aluminum Shapes' prior owner, a private-equity firm, says a
person involved in the deal.
The new owner began a renovation partially overseen by top China
Zhongwang engineer Qingmei Ma, internal company documents show. A
Zhongwang spokeswoman said Ms. Qingmei visited Aluminum Shapes, and
declined to make her available to comment.
Thousands of tons of aluminum pallets began arriving at Aluminum
Shapes in 2013 in packaging labeled "China Zhongwang," says Garry
Goehring, a former Aluminum Shapes manager whose account is
supported by current and former employees and shipping records.
Mr. Goehring says he believed the pallets were a way of avoiding
tariffs because they were too heavy—150 to 250 pounds apiece—to be
of practical use for shipping. Their heavy weight, he said, seemed
useful only as a way of getting a big mass of aluminum past
Customs.
Aluminum Shapes says the pallets averaged around 165 pounds.
AplusPallets, an Accident, Md.-based manufacturer of aluminum
pallets, sells similar ones that weigh about 50 pounds, which is
normal for the market, says sales manager Ken Hunt.
Aluminum Shapes later melted down some of the pallets to be used
as raw aluminum to make other products to sell on the U.S. market,
Mr. Goehring says.
Aluminum Shapes denied that the aluminum was used as raw
material for its plant. The company, which makes a variety of
products including construction beams, helicopter-pad components
and boat flooring, says all of its raw material comes from North
American sources.
Mr. Liu visited the New Jersey plant and met with managers, say
Mr. Goehring and other Aluminum Shapes employees. Mr. Goehring said
he quit in 2014 after Mr. Liu accused him of financial
improprieties, which he denies. Mr. Liu denies knowing Mr.
Goehring. Aluminum Shapes said he left "under mutually agreed to
circumstances." The Zhongwang spokeswoman said Mr. Liu visited the
plant but didn't make management decisions.
Shipping records provided by Aluminum Shapes show it received
millions of dollars worth of aluminum pallets in 2013. Aluminum
Shapes says the metal came from a California company called Peng
Cheng Aluminum under arrangements made by Mr. Shao. A spokesman for
Aluminum Shapes said the pallets "are Johnson Shao's property."
In late 2014, Peng Cheng and Global Aluminum, owner of Aluminum
Shapes, were merged into a California company called Perfectus
Aluminum. California corporate records list Mr. Liu's son, Liu
Zuopeng, as president and secretary of Peng Cheng, Global and
Perfectus. Aluminum Shapes says the owner of Perfectus is now Jacky
Cheung, whom people familiar with the business say is an associate
of the elder Mr. Liu.
The Commerce Department says Peng Cheng's activities and
Perfectus are part of its probe.
Attempts to reach Messrs. Shao and Cheung and Mr. Liu's son were
unsuccessful, as were attempts to obtain a response from Perfectus.
The China Zhongwang spokeswoman said Mr. Shao is a customer of her
company.
Last month, a company affiliated with China Zhongwang agreed to
acquire Cleveland-based Aleris Corp. from its private equity owners
for $1.1 billion, the highest price ever paid by a Chinese firm for
a U.S. metals producer.
Mr. Liu said at the time that the deal offers a "complementary
business foothold" in the U.S.
A spokesman for Aleris said the company "will continue to be
operated as a separate stand-alone entity" following the
acquisition.
Chuin-Wei Yap in Liaoning, China, contributed to this
article.
Write to Justin Scheck at justin.scheck@wsj.com, John W. Miller
at john.miller@wsj.com and Scott Patterson at
scott.patterson@wsj.com
(END) Dow Jones Newswires
September 15, 2016 14:55 ET (18:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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