China's Primary Aluminium Production Growth to Slow in 2008

SHANGHAI (Interfax-China) -- China's primary aluminium output growth will slow this year and remain in a downtrend over the next few years due to high production costs, industry officials told Interfax in Beijing.

China's primary aluminium output is set to hit around 15 million tonnes this year, up over 19% from last year, but the growth rate will drop 15 percentage points from last year, according to a forecast from the China Nonferrous Metals Industry Association.

"We recently revised our estimate for the country's primary aluminium output this year to 15 million tonnes, from a previous estimate of 15.50 million tonnes, after taking into consideration a slowdown in aluminium production during the first quarter due to snowstorms," Lang Dazhan, vice director of the CNMIA's aluminium department, told Interfax on the sidelines of the 2008 China Aluminum Industry Chain Forum held in Beijing yesterday.

China produced 12.56 million tonnes of primary aluminium in 2007, and 3.12 million tonnes of primary aluminium in the first quarter of this year, up 7.9% from the same period last year, according to the National Bureau of Statistics (NBS).

"China's primary aluminium production annual growth rate peaked in 2007 at 34%, and we predict that the growth rate will drop to around 20% in 2008 due to less investment in aluminium smelting projects. However, the tonnage of aluminium output in China will still be large compared to other countries," Gayle Berry, an analyst from Barclays Capital Commodities Research, told Interfax yesterday.

Barclays Capital has also predicted that China's primary aluminium production will reach 15 million tonnes in 2008. The country will also become a net importer of primary aluminium this year, according to the company.

Energy tightness will be a long-term issue preventing China's primary aluminium production from expanding at its previous pace, especially as the country's primary aluminium production is already well below capacity, Berry added.

In addition, China's tightening polices on large-scale investment in the aluminium smelting sector, primary aluminium exports and raised energy prices are dissuading smelters from building new capacities.

Aluminium smelters currently consume an average of 15,000 kilowatt hours of electricity per tonne of primary aluminium produced, overshooting government regulations that require smelters to consume under 14,450 kWh per tonne of primary aluminium produced.

Despite slowing production, China's aluminium market will still be pressured by surplus this year, due to the possible release of further controlling export policies and consumption slowdown on the back of tight power supplies. However, prices will be supported to some extent by high raw material costs, an industry insider told Interfax at the forum.

"We believe that this year's domestic aluminium prices will be decided by the government's export policies on aluminium semis [aluminium semi-finished products], as well as primary aluminium consumption from fabricators," Yang Yinghui, an analyst with COFCO Futures, said.

Shanghai aluminium futures will fluctuate between RMB 18,200 ($2,597.11) and RMB 21,500 ($3,068.01) throughout this year, supported by high raw material costs, while the three-month aluminium price on the London Metal Exchange (LME) will reach between $2,800 per tonne and $3,500 per tonne, Yang said.

She also said that consumption in Guangdong Province, which contains the largest number of aluminium fabricators in China, is extremely vulnerable to power supply tightness this year.

Power shortages have already forced Guangdong's aluminium fabricators to cut production over the last two months, and while their production levels have almost returned to normal this month, those fabricators will still be challenged by power supply shortfalls in the summer, she said.

"The high cost of raw materials, including electricity, alumina and anodes, has driven costs of aluminium smelters up to RMB 18,000 ($2,568.57) per tonne, which is close to the current domestic aluminium cash price. Moreover, aluminium smelters will be forced to cut production if cash prices fall," Lang from the CNMIA said.

Lang also revealed that a possible decline in value-added tax rebates for aluminium semis exports has been discussed by various government departments, and the central government has been paying much attention to the growing exports of aluminium semis, such as aluminium tube, foil and plate, since last September.

There is market expectation that China will cut the VAT rebate on aluminium tube, foil and plate exports by between 11% and 13% to 5% on June 1, and is likely to cancel VAT rebates in December this year.

"There will be an adjustment to the current VAT rebate polices on aluminium semi exports within the year, although a specific date has not yet been settled on," Lang said.

Guangdong's aluminium fabricators are lobbying the central government to reduce the rebate cut and delay the release of the policy, several aluminium fabricators told Interfax at the forum.

China will continue to dominate the world's aluminium demand growth, and the nation's primary aluminium consumption will reach 15.46 million tonnes this year, up 29% from last year. However, the growth rate will fall 9.5 percentage points from 2007, according to the Barclays Capital prediction.

Growing investment in China's aluminium processing sector and the huge expansion in the country's aluminium semis capacity will maintain the strength of China's primary aluminium consumption, but mean that there will be less aluminium for the rest of the world.

"The global aluminium market is looking increasingly tight and is forecast to more into a large deficit in 2009," Berry said.

She forecast an average cash price of $4,500 per tonne for aluminium on the LME next year, up from this year's estimated $3,470 per tonne.

The most-traded aluminium contract on the Shanghai Futures Exchange closed at RMB 18,885 ($2694.85) per tonne yesterday, down 1.38% from the previous trading day, while the LME three-month aluminium contract grew 0.49% to end at $3,075 per tonne last Friday on April 18. LME aluminium hit an annual high of $3,240 per tonne on March 6 this year.

Chinese spot aluminium prices ended RMB 60 ($8.56) per tonne higher to close at between RMB 18,660 ($2,662.75) per tonne and RMB 18,700 ($2668.46) per tonne yesterday.

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