Growth of China's primary aluminum output to inch up in 2009 - analysts

China's output of primary aluminum in 2009 is expected to increase slightly on this year's amount as smelters continue to cut production in response to sluggish demand, analysts with Beijing-based Antaike Information said at an industry conference in Hainan Province's Sanya City on Dec. 4.

Analyst Wang Feihong said that China's primary aluminum output this year is estimated to reach approximately 13.9 million tons and consumption is forecast to reach 13.41 million tons, up 3 percent year-on-year, which takes into account the impact of the ongoing global financial crisis on China's economic growth.

As such, aluminum prices will stay around RMB 120,000 ($17,522.85) per ton in 2009, as market fundamentals will be more balanced with only a small surplus, consisting of approximately 190,000 tons of primary aluminum, according to Wang.

As of the end of November, China had suspended approximately 3.22 million tons of primary aluminum capacity, accounting for 18 percent of the country's total. Wang estimated that idle primary aluminum capacity will amount to 3.7 million tons by the end of 2008, among which 2.2 million tons will be newly-built capacities. In addition, various primary aluminum expansion projects in the construction or planning phases have been either delayed or suspended in an endeavor to cut costs and reduce investment to weather the global financial crisis.

"Meanwhile, the government will continue to control expansion of primary aluminum smelting capacity, which is regarded as an energy-intensive sector according to the state's industry development guidelines, through the process of project approvals. China's aluminum industry will only expand to meet domestic demand, and the aluminum industry will by no means follow in the steel industry's blind expansion footsteps," Kong Lingxin, a senior official with the Nonferrous Metals Industry Group of China, said.

"However, it is worth mentioning that it is also possible that aluminum smelters may not cut production in response to market demand entirely, which would pull aluminum prices down in the future, although inreality, aluminum smelters have to give in to poor market demand as consumption is not expected to pick up even on lower prices," Wang said.

"Due to an approximate RMB 200 ($29.20) per ton, or a 25 percent, slidein coal prices during the past two months, aluminum smelters that own power plants have seen their production costs drop by approximately RMB1,400 ($204.43) per ton. Encouraged by the enlarged profit margins resulting from the coal price decline, those primary aluminum smelters may be reluctant to run their operations at low levels," Wang said.

"In addition, power shortages, which resulted in primary aluminum production cuts in Shanxi and Guizhou provinces earlier this year, are expected to resolve in 2009 with the country's power capacity expansion projects, which, in theory, will also encourage smelters to increase production under certain market conditions," Wang said.

While aluminum production is estimated to increase slightly, 2009 alumina consumption by aluminum smelters, is forecast to stay unchanged from this year, at 27.83 million tons.

Zhu Yan, another Antaike Information analyst, estimated that by the end of 2008, China's total alumina production capacity will amount to approximately 32.97 amillion tons per annum, among which approximately 16 million tons will be new capacities from various expansion projects in Shanxi, Shandong, Henan, Yunnan and Guizhou provinces, as well as in Chongqing Municipality and the Guangxi Zhuang Autonomous Region.

However, the sluggish market will likely mean that most of these new capacities will be left idle in 2009. According to Zhu, the country's 2009 alumina output is estimated to stand at 25 million tons, edging up 1.8 percent from 2008. Ongoing production cuts among alumina producers will likely become more apparent in the market in the first quarter of 2009.

Alumina producers, like aluminum smelters, are also benefiting from the current price drops in raw materials. "The production costs of alumina also declined in mid-November to RMB 1,513 ($220.93) per ton for producers using domestically-produced bauxite and to RMB 1,972 ($287.96)per ton for producers using imported bauxite," Zhu said.

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