China's aluminium stocks surge on weak demand

China's stocks of primary aluminium have risen more than 50 percent in the past six weeks on reduced demand, despite smelters having shut some capacity on low prices, smelter officials and traders said on Monday.

Fears of a global economic slowdown prompted by the financial crisis have reduced orders for aluminium products from buyers both overseas and in China, the world's biggest market for the metal used in the construction, car and packaging sectors.

Smelter officials, traders and product producers see about 800,000 tonnes of primary aluminium ingots being stored in private and public warehouses and smelters' yards, with the biggest estimate above 1 million tonnes. Stocks were at about 500,000 tonnes in late September, half of China's monthly output.

"The stocks now are at least 800,000 tonnes. There is no doubt about it," a manager at the trade department of a large aluminium smelter in Henan province said.

"Domestic demand is getting worse, while exports have dropped," the trade manager said.

He said the smelter had shipped primary aluminium ingots to merchants' warehouses and would not get paid until the metal was consumed.

Stocks have risen, even though smelters have halted more than 1 million tonnes of aluminium smelting capacity, about 6 percent of China's total, smelter officials said. This may cut China's output by at least 250,000 tonnes in the fourth quarter.

Chalco, the top aluminium maker in China, had idled 38 percent of capacity, or 720,000 tonnes, due to low prices, it said last week.

"The biggest problem is that demand is very weak," a manager at the international trade department of a large smelter said.

The rise in China's stocks mirrors that on international markets, where aluminium inventories held at London Metal Exchange warehouses have risen by a third since the start of September to just over 1.5 million tonnes.

Exports of aluminium alloy have also dropped sharply after Beijing imposed a new 15 percent tax on the exports in August.

Prices of spot aluminium in China have fallen by a quarter since early July and 10 percent since late September to 13,760 yuan a tonne on Monday on weak domestic demand and low international prices, which at $1,990 a tonne are down 41 percent from July's record high.

Falling prices are spurring domestic and overseas buyers to default on contracted shipments of aluminium products, forcing fabricators to reduce production, said a manager at a fabricating plant in Nanhai city in Guangdong province, home of thousands of aluminium product exporters.

He added fabricating plants were asking domestic buyers to pay downpayments in cash for new orders. But tighter credit from Chinese banks had reduced firms' cash flows, making such downpayments unaffordable.

Aluminium stocks may rise further as demand from building projects in northern provinces falls in the winter and fabricating plants are finishing off this year's export orders.

Many fabricating plants have not secured full exports orders for delivery in the first quarter next year, in the light of the global recession.

"Our export orders for delivery in the first quarter have fallen by a half so far," the fabricating plant's manager said.

He added overseas buyers were uncertain on next year's global economy and were unwilling to place new orders.

Demand would also fall during the Chinese Lunar New Year holidays in late January to early February 2009, traders said.

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