Chalco slashes alumina prices 17 pct, shares tank

HONG KONG, June 3 (Reuters) - Aluminum Corp of China Ltd (2600.HK: Quote, Profile, Research) (601600.SS: Quote, Profile, Research), the world's third largest producer of alumina, slashed spot alumina prices by 16.7 percent on Tuesday in its first such reduction since December, sending its shares 4.3 percent lower.

Stock in China's biggest aluminium firm marked their largest single-day percentage drop since April 14 on fears the move could hurt profits at Chalco, but add profits of 1,400 yuan per tonne to smelters that use the new Chalco price, smelter officials and analysts said.

"We want to release some stocks," one Chalco source told Reuters without elaborating on specific levels. "The move was also to follow market prices."

Chalco was offering spot alumina at 3,500 yuan ($505.4) a tonne versus 4,200 yuan on Monday, it said on its Web site (www.chalco.cn). It raised spot alumina prices 10.5 percent to 4,200 yuan in mid-December.

Daiwa Securities' Geoffrey Cheng estimated the price cut would reduce Chalco's revenue by 350 million yuan, assuming spot sales of 1 million tonnes this year and the latest price would affect six months of income.

"If there is no impact on costs, then all goes to profit. The profit loss would be 350 million yuan," Cheng said.

Chalco's prices for 2008 term contracts are set at around 17 percent of aluminium, which equalled 3,148 yuan based on the Tuesday closing price of the Shanghai June contract SAFM8. 

DOWNTREND

Spot prices of alumina, the raw material for the production of primary aluminium, have fallen more than 20 percent this year to around 3,500 yuan a tonne in China, hit by increased production from Chinese refineries, including Chalco's.

Chinese alumina production rose 19 percent on the year to 7.2 million tonnes in the first four months of this year.

Chalco said last week the group's alumina production would come in at below 11 million tonnes this year versus last year's 10.2 million tonnes.

About two tonnes of alumina are needed for production of one tonne of primary aluminium in China.

Chalco had maintained spot alumina prices well above prices offered by other refineries in the past two months, which helped keep the price from falling deeper, smelter sources said.

The latest Chalco price reduction was likely to add pressure on spot prices.

"This week, we started seeing offers at 3,450 yuan a tonne, signalling a downtrend," a trade manager at a large smelter in the central province of Henan said.

He said smelters in Sichuan had briefly reduced purchases of spot alumina after the May 12 earthquake, raising availability in the spot market.

But the trade manager did not see the extra profits from Chalco's price cut as a long-term benefit to smelters.

"The extra profits could be short-lived. Aluminium prices may fall because demand is weakening," the Henan trade manager said.

He added that China's tight credit conditions had cut aluminium end-users' access to cash to buy the metal, which is used in the construction, packaging and auto sectors.

Cash production costs in China are around 17,500-18,000 yuan a tonne, leaving margins of 500-1,000 yuan for spot metal, which traded at about 18,500 yuan per tonne on Tuesday.

(Editing by Christopher Johnson)

($1=6.9258 yuan)

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