China's Yunnan eyes 1-million T aluminium project

Yunnan Metallurgical Group, the parent of Yunnan Aluminium Industry (000807.SZ), and the government of Zhaotong city have signed an agreement to build a plant with one million tonnes a year of aluminium smelting capacity, industry and city officials said on Thursday.

The plant, if built, could be operated by Yunnan Aluminium given China's requirement that listed companies' parents are not allowed to compete with their listed arms.

Yunnan Aluminium already operates 400,000 tonnes a year of smelting capacity and is building a plant to produce alumina, the main raw material for aluminium production, in Yunnan province.

"They signed the framework agreement the day before yesterday," an official at the economic and trade commission in Zhaotong city in Yunnan province told Reuters. He was referring to the city government and Yunnan Metallurgical.

The city government and Yunnan Metallurgical have not set a timetable to start construction of the first phase, which will be 300,000 tonnes of smelting capacity a year, because the whole project will be determined by electricity fees and Beijing's approval, he said.

The plant is set to be built near a new hydro-electric power station, which is expected to provide cheaper electricity to the energy-intensive aluminium smelter, he said.

Preparation work for the construction of the hydro-electric power station has nearly finished and the building is expected to start soon.

But construction of the aluminium project may face hurdles given that Beijing has repeatedly warned that the country has overcapacity in the aluminium industry and aims to phase out combined 800,000 tonnes of old smelting capacity by 2010. [ID:nSP517410]

China, the world's top aluminium producer, has 20-30 percent excess production capacity of primary aluminium, Xiong Weiping, the chairman of China's top aluminium firm Chalco (2600.HK) said this month. [ID:nPEK18496]

China's annual smelting capacity has surpassed 18.5 million tonnes. Officials expect capacity to reach nearly 20 million tonnes by the end of this year.

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