Aluminum plant restoration risks

Non-ferrous metals are shining stars in China's futures and securities markets with their record high futures prices and hikes in share prices. The aluminum industry, in particular, is being spotlighted for significant growth. However, experts say the current prosperity may have over-charged futures' profits in the sector.

The average cost of China's electrolytic aluminum is 13-thousand yuan per ton. The market price now stands at over 15-thousand yuan. The potential profits have propelled many domestic aluminum plants that reduced output in 2008 to restore their production.

Yang Yinghui, GM of Metal Products Dept., COFCO, said, "Domestic plants used to face deficient operating rates amid the financial crisis. But now the rate has increased to 80 percent from a low of 60 percent."

However, many insiders say this will also bring risks. Although China's economy has started to rebound, the expansion rate of non-ferrous metals has exceeded the overall economic growth. The over-surging prices of such basic materials would add cost to the real economy, and in turn stifle the economic rebound.

Insiders say prices of non-ferrous metals have shown signs of a bubble. They suggest staying alert.

Wen Xianjun, Vice Chairman of China Non-ferrous Metals Ind. Assoc., said, "The electrolytic aluminum industry has already faced over-capacity. If aluminum plants make full use of their capacity, it's hard for the domestic market to digest all the supplies. By then, the over-supply, plus 15-percent export tariffs, will help drive up global aluminum prices. By that time, if investment capitals escape from the sector, the prices would then see a sudden dive."

Given all the potential risks, insiders suggest those manufacturers who have not restored production ... not do so in a rush.

They also warn that if the aluminum prices go down sharply, dealers' hoarding will not only cause their own losses, but also harm the banking sector.

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