China smelters output to fall

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

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

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

The anticipated cuts will be on top of a 10% 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 excess capacity.

Aluminium oxide, or alumina, is Australia's eighth-biggest minerals export. The price is typically tied to aluminium prices in long-term contracts.

The aluminium price has plunged 38% since July and was trading yesterday at a three-year low of $US2043 a tonne on the London Metal Exchange.

Alumina demand will fall further as aluminium producers are driven out of business, with about one-fifth of Chinese aluminium feeding into the car 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.

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

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

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

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

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

This week the Government announced it would scrap some real estate taxes and introduce export rebates. It has already introduced measures to stimulate consumption among China's 800 million peasants. It raised the grain purchase price 15% and announced subsidies for peasants to buy refrigerators, washing machines and television sets.

China now produces more aluminium than do Russia, Canada, the US and Australia combined, after production grew by an annual average of 18% in the decade to 2007.

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

Rio Tinto says its low-cost Canadian aluminum assets will benefit in the long term from the reduction in supply.

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