Price dips may cut aluminum output

By Glenys Sim (China Daily)
Updated: 2010-06-23 09:37
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SINGAPORE - Chinese aluminum producers may cut output from a record if the current price slump persists and after the world's third-largest economy signaled an end to its currency's fixed rate to the dollar.

China, the world's largest maker of the metal, produced 1.416 million metric tons in May, the highest monthly total ever, said China International Futures (Shanghai) Co analyst Wang Zhouyi, as higher power costs were offset by falling prices of alumina, the raw material used to make aluminum.

Aluminum prices in Shanghai have tumbled 15 percent this year, while London Metal Exchange prices dropped 12 percent, on concern that Europe's debt crisis will slow the global recovery and China's curbs on lending will cool demand. The average cost of aluminum production in China is 15,300 yuan ($2,247) a ton, according to CRU International Ltd. That compares with Tuesday's Shanghai Futures Exchange price of 14,845 yuan a ton.

"We will see production curtailments in China unless the government rescues them, and the rhetoric from the government up till now has been precisely the opposite," said Alan Heap, managing director of global commodity analysis at Citigroup Inc.

An appreciation of the Chinese currency will put "further upward pressure" on costs, said Heap.

The People's Bank of China said on June 19 it will allow greater "flexibility" in its currency, signaling it would abandon the 6.83 yuan peg to the dollar adopted during the global crisis to shield exporters. The central bank ruled out "large changes" in the exchange rate and said it will prevent "excessive" moves.

'Little upside'

"Exports are expected to increase if production continues to rise," said China International's Wang. "However, a stronger yuan will hurt exporters, so there's little upside for the aluminum industry at the moment."

China, also the world's largest user of the metal used in cars and airplanes, resumed being a net importer in May, according to data from the Beijing-based Customs General Administration.

In April, it exported more aluminum than it imported for the first time since the end of 2008 as supply outpaced demand.

"These sort of circumstances, where the prices fall to the global industry average cash cost, that's what you see in a full-on global recession," Citigroup's Heap said in a phone interview from Sydney. "So the aluminum industry is telling us the world is in economic recession, which I don't think it is. Output cuts will protect the downside."

There's little evidence of output cuts so far, even though more than 40 percent of the Chinese aluminum industry is incurring losses, Barclays Capital said on Monday.

Power costs

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The Chinese government last month ended discounts on electricity charges and doubled surcharges for high-consumption companies. CRU International expects 1.3 million tons of capacity in the country to be affected by the surcharge. Energy represents as much as half the cost of producing aluminum.

"It's unprofitable to make aluminum, but it will cost producers even more to stop making it, so unless the price holds below the cost of production in the next few months, it's unlikely we'll see output fall," said Wang.

Bloomberg News