Chinese aluminum smelters may idle their annual capacity by one-third, the most in three years, as energy costs soar and prices slump.

China may produce almost 20 million metric tons of the lightweight metal and its capacity may be as much as 30 million tons by the end of this year, said Luo Rongjin, a Beijing-based analyst with Bocom International Holdings Co. Monthly output from China, the world’s biggest producer, fell 8.3 percent in November from a record 1.6 million tons in August.

Alcoa Inc. (AA), Rio Tinto Group and their global rivals are cutting production after prices dropped 19 percent last year, curbing profits. Alcoa, the largest U.S. producer that reported its first loss in two years this week, said China may use 70 percent of its capacity in 2012.

“China’s aluminum industry is becoming less and less competitive because power is going up and many producers are making losses,” Peter Hickson, managing director of Global Commodity Research and Basic Materials Strategy at UBS AG, said in an interview in Shanghai. Chinese smelters may idle 1 million or 2 million tons of capacity this year, adding to 6 million tons of surplus capacity in 2011, he said.

Aluminum Corp. of China Ltd., or Chalco, the nation’s biggest producer of the metal used in aircraft, beverage cans and car parts, is “actively studying the market” and may adjust production when needed, spokeswoman Shen Hui said. China will curtail 1.1 million tons of aluminum output capacity this year, Alcoa Chief Executive Officer Klaus Kleinfeld said Jan. 9.

Further Cuts

“We should watch out for further production cuts in and outside China as many aluminum smelters are operating at a loss given the low prices,” said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt. “Aluminum will be strongly influenced by macroeconomic data and political actions, especially regarding the sovereign debt crisis in the euro zone.”

Falling prices may force 3 million tons of global capacity to be closed or mothballed, Oleg Deripaska, CEO of United Co. Rusal, the world’s largest producer, said last month. Rusal itself isn’t planning to cut output yet, and is monitoring the market closely, the Moscow-based company’s press service said yesterday in an e-mail.

Alcoa this month said it would halt 12 percent of its global capacity and Rio, the world’s third-biggest producer, said in November it would shut its Lynemouth smelter in England. Norsk Hydro ASA, Europe’s third-largest producer, said Jan. 10 it may take some capacity offline at its smelter near Newcastle in Australia.

Low Prices

Aluminum prices will stay low until Chalco and other smelters cut production, UBS’s Hickson said. Prices may average $2,275 a ton, down from last year’s $2,397, according to the median of 18 analyst estimates compiled by Bloomberg.

“Ten to 20 percent of production cuts in 2012 is normal,” Lu Changqing, executive director and vice president of China Zhongwang Holdings Ltd., said in a Jan. 9 interview. The company is Asia’s largest industrial aluminum-extrusion products maker with annual capacity of 700,000 tons, according to a regulatory filing. “Prices have fallen to some of the smelters’ cost of production. They are unlikely to sustain losses for long.”

China raised retail power prices by an average 0.03 yuan (0.5 cents) a kilowatt-hour from Dec. 1, squeezing profits at smelters that don’t have access to cheaper fuel. That would raise costs by as much as 500 yuan for producing a ton of aluminum, or equivalent to an increase of as much as 5 percent of total costs, Chalco’s Shen said.

‘Heavy Blow’

“More than half of Chinese smelters are already making losses,” said Lang Dazhan, deputy head of China Nonferrous Metals Industry Association’s aluminum unit. “The latest power- rate hikes give another heavy blow and may force them to curtail production in the first quarter. Chalco is certainly a victim.”

Smelters in China’s Henan, Guangxi and Hunan provinces are the worst affected because they are paying the highest power rates, Lang said. Chalco may cut production at its high-cost units in Henan and Shanxi provinces in the first quarter, said Bocom’s Luo.

China’s primary aluminum production gained 9.9 percent to 16 million tons in the first 11 months last year from a year ago, according to the National Bureau of Statistics.

China’s economy grew 9.1 percent in the third quarter from a year earlier, the slowest pace since 2009, on weaker export demand and monetary tightening. Aluminum inventories monitored by the Shanghai Futures Exchange gained for a fifth week last week to 221,624 tons, the highest since July.

Production Restraint

Aluminum prices in London have slumped 23 percent from a record in May to $2,170 a ton at 2:34 p.m. Shanghai time today after global growth decelerated amid a sovereign-debt crisis in Europe and China’s government action to control inflation.

“Smelters will need to show production restraint in the coming years to restore a degree of normality on the aluminum market,” Bank of America Corp. said in a weekly metals report Jan. 9. The bank estimated prices may reach $2,275 a ton this year and $2,375 in 2013.

Still, China will add 3 million tons to 5 million tons of new capacity this year to the existing 24 million to 25 million tons, even as most of the producers won’t make a profit, according to Bocom’s Luo.

Many of these projects are located in provinces such as Gansu, Ningxia and Inner Mongolia that may have access to cheaper electricity or are closer to energy sources, intensifying competition to plants in eastern regions owned by larger players such as Chalco, Luo said.

“Steel and aluminum projects generate huge output value, and are always a big driver for local GDP and the government’s tax revenue,” he said. “Local governments encourage these projects to be built, sometimes even without appropriate approval.”

Aluminum smelting capacity in China may reach 35 million tons a year by the end of 2015 from 25 million tons last year, with most of the projects located in western regions including Xinjiang province, Macquarie Group Ltd. analysts, led by Bonnie Liu, said in a report dated yesterday.

Source:chinabevnews.com