China Guanlu to shut 40,000 T of aluminium capacity

China's Shanxi Guanlu 000831.SZ said on Friday it was shutting 40,000 tonnes of aluminium capacity due to low prices and weak demand, despite state purchases of the metal.

The shut capacity amounted to 36.4 percent of its aluminium production capacity, it said in a statement filed to the Shenzhen Futures Exchange. It did not give the timeframe for the shutdown.

It has 110,000 tonnes of primary aluminium capacity.

"Smelters have made losses and Guanlu cannot keep (full production) for longer," Heng Kun, analyst at Essence Securities said.

"Guanlu probably does not know how long it would have to shut the capacity," he added.

Guanlu said it would also shut down all of its 6,000 tonnes of capacity used to produce high-purity aluminium.

Demand for aluminium in China, the world's top consumer and producer of the metal, has fallen since July last year on poor performance in the housing sector, the top user of the metal in the country

Demand weakened further from October last year as the global financial crisis reduced consumption of aluminium products, driving down metal prices and forcing smelters, including China's Chalco and U.S.'s Alcoa (AA.N), to cut production.

Benchmark three-month aluminium contract prices on the London Metal Exchange MAL3 have fallen by a half from its record high in July 2008, to $1,563 a tonne on Friday.

Chalco temporarily closed 720,000 of aluminium smelting capacity in China from October last year, while industry sources said the firm might extend the cut soon.

About 4 million tonnes of existing aluminium capacity in China is estimated to have stopped production since the second half of last year. Another 4 million tonnes of new capacity has not started production, even though the capacity is already built, smelter officials have said.

Aiming to help smelters, the State Reserves Bureau is believed to have agreed to buy a total of 290,000 tonnes of aluminium this month, of which 20,000 tonnes from Guanlu and 150,000 tonnes from Chalco (2600.HK)(601600.SS). [ID:nPEK7636]

The move has driven up Chinese prices of spot aluminium SAFF9 by more than 5 percent this week to 12,280 yuan ($17,980) a tonne on Friday.

"This week's price rise may cause smelters to wait and see if they are thinking of further production cuts," Heng said.

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