Aluminium smelters braced for shutdowns

The mainland's overcapacity-afflicted aluminium smelting industry could soon see a widespread shutdown of uncompetitive plants partly because of more cost-competitive imports, according to the chief of the country's third-largest smelter.

"The second phase of industry rationalisation is already beginning," said Zhang Bo, the chief executive of China Hongqiao.

"The first phase involved capacities that were very outdated, while the second will hit those that are still surviving but will face stiffer rivalry from imports."

Zhang made the comments at a press conference three days after the firm posted a 1.1 per cent year-on-year drop in net profit to 2.81 billion yuan (HK$3.53 billion) for the first six months of the year.

Its performance, supported by self-owned power plants, is among the best in the industry where losses are common due to rising energy and raw material costs. Electricity typically accounts for close to 40 per cent of smelters' operating costs.

Zhang said the industry's competitive threats came from a planned major aluminium smelter project in Malaysia supported by cheap hydropower and greater push from Rusal, the world's largest smelter of the lightweight industrial metal, to sell to China.

Despite the threats, Andrew Driscoll, CLSA's head of Asia-Pacific resources research, said he did not expect imports to account for a major portion of supply since low-cost plants were also being built in coal-rich regions such as Xinjiang.

"New capacities are being built both within China and the rest of the world at the bottom of the cost curve," he said.

China Hongqiao plans to raise its annual smelting capacity to 2.9 million tonnes by the end of the year from 2.46 million tonnes in June. This could cost 2.64 billion yuan.

It plans to become entirely self-sufficient on electricity and alumina in three years. It is 65 per cent self-sufficient on power and 69 per cent self-supplied on alumina in the first half.

Zhang said China Hongqiao planned to "eventually" raise self-owned power generation capacity to 6,000 megawatts from 3,390 MW now, without giving a timetable. It costs 3,500 yuan to add one megawatt.

The firm expects its alumina refinery in Indonesia to come on stream in 2015. It will have its own power plant and port.

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