China aluminium output roars on, despite price collapse

China's aluminium market, the world's largest, will remain weak for the next six months if smelters do not cut production by at least half a million tonnes before the end of the year.

But few smelters are likely to pare production, despite some marking losses as prices plunge to their lowest since 2004.

At a conference in the central city of Chongqing, officials from Chinese aluminium smelters, alumina refineries and trading firms said prices would continue at levels well below marginal costs, unless smelters significantly cut back output.

Chinese smelting capacity has exploded in recent years. In the first eight months of 2008, the country produced 8.9 million tonnes of metal and is on track to churn out more than 13 million tonnes in the whole of 2008, twice the output in 2004.

Worries about oversupply and soft demand have dragged Shanghai aluminium futures down by almost a quarter since mid-June, to a 4-year low of 15,200 yuan, as stocks balloon and demand for aluminium products both domestically and abroad slows.

"Production cuts would have to reach 500,000 to one million tonnes, it won't make any difference," a manager at Shenzhen North Investment said, which trades aluminium.

More than half a million tonnes of primary aluminium is thought to be stored in warehouses in China, and even more squirreled away in smelters' yards.

Stocks have doubled in the past 2-3 months because of reduced export orders of fabricated products and the weak performance o China's property market, which accounts for a third of China's aluminium consumption.

But despite a general recognition that cutbacks are needed, officials from aluminium smelters, alumina refineries and trading firms said they had not seen major curtailments.

"The rising stocks trend is likely to continue unless we see a serious cutback in production, which is unlikely," an aluminium trader in Hong Kong said.

"More than half of China's capacity has been built in the past five years, and they haven't recouped their investment, so they will try and continue for as long as they can."

Earlier this week, China's top aluminium producer, Chalco, said it planned to maintain output despite low prices that are well below production costs of about 17,000 yuan faced by smaller, higher-cost smelters in the country.

Most smelters were still maintaining normal production, and some are even starting new capacity, in hopes that high-cost smelters shut down operations first to push up prices. One high-cost smelter, Aostar, said on Tuesday it would start closing a third of the capacity at a 125,000-tonne-a-year smelter this week.

Aostar's production costs are at the top end of Chinese smelters, which are expected to rise further in the winter on falling supplies of cheap hydro-electricity in Sichuan, home of at least another 400,000 tonnes of operating capacity.

China produced 8.9 million tonnes of primary aluminium in the first eight months, up 13 percent on the year. Analysts have said they expect output to reach about 14.5 million tonnes in 2008.

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