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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