Alumina smelter expansion withdrawal not seen as deterrent to Chalco competitors

Top China alumina maker Chalco's decision to shelve plans for a big expansion project in the face of shrinking margins is unlikely to deter smaller competitors, who are determined to grow in spite of the odds.

Aluminum Corp of China Ltd, or Chalco, said on Monday it would not move ahead with a plan to expand alumina capacity at a joint venture in Guangxi because of high building costs and weak prices, a rare instance of a Chinese firm backing away from a project to develop more domestic resources.

Analysts said the decision by the big producer not to invest reflected a shift in focus to overseas resources as it battles rising costs, oversupply and falling prices for alumina, an intermediate product smelted into aluminium.

But none of those factors are deterring smaller rivals who don't have Chalco's global reach, leaving them no choice but to develop their own domestic supplies in the world's top producer.

Although Chalco does not plan to expand the current 1.6 million-tonne facility at Huayin, analysts and smelter officials predict about 8.5 million tonnes of new alumina capacity will be added this year, expanding China's capacity by over a quarter. Another 3 million tonnes of smelting capacity will be added.

Li expects China's smelting capacity to rise to about 19 million tonnes this year from about 16 million tonnes last year, as smelters are still building new facilities despite rising construction costs and a fall in domestic aluminium prices that has all but eliminated profit margins.

CHALCO LOOKS ABROAD

For Chalco, the issue is less about domestic competition than its focus on expansion overseas.

Chalco, the world's third-biggest producer of alumina, is investing in a A$3 billion project to develop the vast Aurukun bauxite deposit in eastern Australia that will produce 5 million tonnes of the clay-like mineral a year.

About four tonnes of bauxite are needed to produce two tonnes of alumina, which in turn yields one tonne of primary aluminium.

Chalco holds a stake in a joint venture project to build a one million tonne a year aluminium smelter in Saudi Arabia.

PROJECTS ON TRACK

Yixiang Aluminium, a subsidiary of coal miner Yimei Group in Henan province, is expanding alumina capacity to 600,000 tonnes from 200,000 tonnes, a company official said. Capacity would rise to 1 million tonnes eventually.

Xinfa Group is running trial production at a 1.2 million tonne-per-year alumina refinery in Jingxi county in Guangxi and may expand the capacity to 1.6 million tonnes a year. [ID:nHKG92608]

But the hurdles are rising.

With China's annual consumer price inflation above 7 percent so far this year, the cost of building primary aluminium capacity in the country has risen to 10,000-12,000 yuan per tonne from about 6,000 yuan two years ago, according to smelter officials.

Chalco has cut spot alumina prices twice since June, by 8.6 percent on Aug 1 and 16.7 percent in early June. Its prices are now at 3,200 yuan a tonne.

And increased production and weak demand have driven down prices of spot aluminium by more than 5 percent in the past month to about 18,250 yuan on Tuesday, a level that already was below costs of production to uncompetitive smelters.

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