China's aluminium producers hit the brakes

CHINA'S aluminium producers are preparing to slash production because of a softening export outlook and deepening construction downturn.

As the commodities boom turns to bust, the Herald understands that two of China's biggest producers told investment bankers this week that aluminium demand will remain soft until at least the second half of next year.

They said China's average cost of production was already 16 per cent above the spot aluminium price and demand from builders and the car industry was falling.

The expected cuts will be on top of a 10 per cent cut already announced by Chalco, China's largest producer.

Michael Komesoroff, an expert on China's heavy industry and principal of Urandaline Investments, said it would take two years for the industry to work off its excess capacity.

"Aluminium's going to be blood on the floor until the end of 2010," he said.

"[Aluminium] is more of a consumer metal, so it's more sensitive to economic downturns."

aluminium oxide, or alumina, is Australia's third biggest mineral export, after coal and iron ore and ahead of copper.

Its price is typically tied to aluminium prices in long term contracts.

The aluminium price has fallen 38 per cent since July and was trading yesterday at a three-year low of $US2043 a tonne on the London Metals Exchange.

Alumina demand will fall further as aluminium producers are driven out of business, with about one-fifth of Chinese aluminium feeding into the vehicle industry and two-fifths into construction.

Car sales fell in August and September from a year earlier, and the construction industry has been flattened by excess supply, tight credit and weak sentiment.

Real estate turnover was down more than 60 per cent over the year to September in most big cities, including Shanghai, Nanjing, Tianjin, Guangzhou, Chongqing and Chengdu.

"We do not see any V-shaped recovery on the horizon," said Morgan Stanley's Derek Kwong in a research report that predicted home prices would fall 20 per cent in the year ahead.

China's industry leaders fear that "demand destruction" is spreading to the wider Chinese economy and hurting all commodity markets.

"Orders for cars and home appliances have already begun to shrink," the chairman of Baosteel, Xu Lejiang, said this week.

"Engineering machinery, petroleum products and ship building are OK, but I don't know how long that can continue."

The average Chinese price of long steel products has fallen 39 per cent in Chinese currency terms since the mid-year peak, including a 15 per cent fall last week, according to the Mysteel price index.

There are tentative signs that steel and iron ore prices may be bottoming this week.

The copper price fell below $US2 a tonne yesterday for the first time since 2005, down about 53 per cent since its peak in May.

Global miners are pinning their hopes on the Chinese Government's ability to rapidly boost domestic demand.

This week Beijing said it would scrap some real estate taxes, and introduce export rebates and measures to stimulate consumption among its 800 million peasants. It raised the grain purchase price by 15 per cent and announced subsidies for peasants to buy refrigerators, washing machines and televisions.

China now produces more aluminium than Russia, Canada, the United States and Australia combined, after production grew by an annual average of 18 per cent in the decade to 2007.

Last week Rusal of Russia, the largest aluminium company, said 75 per cent of producers in China, the US and Europe were not profitable at current prices.

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