China may cut further capacity as prices remain week

Aluminium prices that peaked in 2011 have since retreated by over a third. This year, the three-month aluminium rates on London Metal Exchange have fallen over 10 percent to $1,857 a ton. The price fall of close to five per cent on the Shanghai Futures Exchange is comparatively modest.

Because of Chinese predominance, both as a producer and a consumer of aluminium and its set of controls, the market there has its own dynamics. At the current SHFE of around 14,690 renminbi ($2,399.70), consulting firm CRU estimates that nearly a third of Chinese aluminium producers are losing money.

In response to bad times China has already rested one million tons aluminium capacity. But this is not enough of production discipline to shore up the market. China watchers expect further capacity decommissioning by the world's largest aluminium producer in case SHFE prices fall below 14,000 renminbi.

Notwithstanding whatever capacity has been rested, China’s net production continues to rise, thanks to building of new smelting capacity in the country’s northwest. The region being particularly rich in coal resources, aluminium producers are encouraged to build new smelting capacity in provinces there to take advantage of low-cost, coal-fired power.

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