Aluminum consumption in China to grow 20pct - CBI China

According to CBI China Company, aluminum consumption in China may expand 20% this year as the economy extends a recovery.

Mr Eric Zhang an analyst at the Shanghai based commodities research and forecasting company said that consumption may increase from 14.02 million tonnes in 2009. Still, the country is expected produce 17.5 million tonnes to 18 million tonnes of primary aluminum this year, resulting in an oversupplied market.

China is taking steps to cut overcapacity in the aluminum industry ending discounts on electricity charges and doubling surcharges for high-consumption companies. The provincial government of Henan, the biggest producer, banned new aluminum projects for the next 3 years.

Mr Zhang said that the recent measures to limit production will take effect gradually, the results of which can only be seen in the medium to long term. In the short term, prices will be supported but will have little room to rally as stockpiles are still very high.

CBI’s forecast echoes that of United Company Rusal which said last week that demand in the world’s fastest growing major economy may grow 20% this year. Prices jumped 45% in 2009 on stimulus spending and state stockpiling in China.

Aluminum for 3 month delivery on the London Metal Exchange slumped to less than USD 2,000 per tonne for the first time since February as commodities tumbled on concern that demand for raw materials will slow after European nations slashed budgets to curb deficits. The contract was at USD 2,007 at 10:47 AM in Singapore down 9.6% this year.

Inventories of aluminum in warehouses monitored by the Shanghai Futures Exchange have jumped 61% this year as Chinese smelters ramped up production on expectations that demand will improve as the global economy rebounds.

The National Development and Reform Commission said that China stopped selling electricity at discounts to high consumption companies with immediate effect. Electricity surcharges for most aluminum companies will be doubled to CNY 0.10 per kilowatt hour from June 1st 2010.

Barclays Capital estimated that some companies with obsolete capacity that needs to be closed will have their rates raised 50% to CNY 0.30 per kilowatt hour. This could threaten the closure of up to 2.7 million tonnes of capacity.

Mr Zhang said that this is a way of controlling output by raising production costs and making the operating environment more difficult, but the actual elimination or reduction of capacity will still be determined by market forces. Higher power rates won’t reverse the increase in output and capacity as any eliminated capacity will probably be offset by new energy- efficient smelters coming on stream. However, it will slow the rate of increase.

He said that the cost of operation in Henan isn’t attractive anymore because coal costs have gone up and the government is clamping down on illegal mines, so total power output has been affected. I don’t think this measure will have much impact because Henan isn’t a suitable place to build new projects. The northwest and southwest of the country, where electricity costs are low, may be better.

(Sourced from Bloomberg)

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