China Hongqiao Eyes African Bauxite as Indonesia Supplies Dry Up

China Hongqiao Group Ltd. (1378), the nation’s largest non-state aluminum producer, is in talks to buy a bauxite mine in Africa to secure raw material.

“We are looking to lock up resources in Africa and may make some concrete progress over the next six months,” Christine Wong, head of corporate finance, said in a phone interview from Hong Kong, without disclosing the target or the price. “We must take a controlling stake to make sure we have the offtake for more than 20 to 30 years.”

Hongqiao is seeking bauxite supplies after Indonesia, Southeast Asia’s largest economy, banned exports of unprocessed ore in January. The company, one of the lowest-cost smelters in China, is ramping up output after rivals including Aluminum Corp. of China Ltd. shut plants.

“Demand is still strong even as China is forecast to slow down this year,” Wong said, “We see demand from the construction of social housing, high-speed railways, ultra-high voltage grids and coal cars.”

Hongqiao plans to boost production by 30 percent to almost 3 million tons this year, Wong said. The plan may help Hongqiao become China’s biggest aluminum smelter by output, surpassing Aluminum Corp., which plans to shut as much as 1 million tons of capacity out of 3.6 million tons.

Hongqiao has 16 million metric tons of bauxite stockpiles, enough for about 14 months, Wong said. It also has signed a three-year supply contract with Rio Tinto Group (RIO) to buy at least 3 million tons of the ore annually from Australia and has supply agreements with India, she said.

Chinese smelters are not in any immediate danger of running short of the aluminum raw material, according to an estimate by Bloomberg Industry in February. China may have as much as 17 months of supplies before it needs to increase imports from other countries, the report said.

Hongqiao may increase its aluminum refining capacity to 3.44 million tons by the end of this year from 2.96 million tons in 2013, Wong said. The company is building a venture for an alumina plant in Indonesia and expects to start production in 2015, the company said in March.

Moscow-based United Co. Rusal, the world’s largest aluminum producer, this week said its first-quarter loss narrowed to $325 million because of rising aluminum premiums and reduced costs. Strong demand in Asia and the U.S. and a sustained rebound in the European market helped global aluminum consumption in the quarter to increase 6 percent to 12.6 million tons from a year earlier, Rusal said.

About 95 percent of Hongqiao’s aluminum sales volume is shipped in molten form to customers within a 30 kilometer (19 mile) radius of its facilities in Shandong, Vanessa Lau, a senior analyst with Sanford C. Bernstein & Co., wrote in April after visiting Hongqiao’s plants.

The “unique part” of Hongqiao’s business model, enabling customers to recast aluminum into their desired shapes without the need to re-melt ingots, would limit its expansion beyond the Shandong base, Lau said.

Hongqiao’s capital expenditure this year will be reduced to 8 billion yuan ($1.3 billion), largely for building power plants, from about 15 billion yuan last year, Wong said.

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