Chalco plans to double capacity

PUBLISHED : Monday, 29 August, 2005, 12:00am
UPDATED : Monday, 29 August, 2005, 12:00am

Aluminium firm to acquire more smelters on forecast surge in electricity supply

Aluminum Corp of China (Chalco) plans to double its smelting capacity in five years as it expects the power industry's looming overcapacity to help ensure electricity supply and lower tariffs.

In an interview with the South China Morning Post, chairman Xiao Yaqing said the company intended to add 'a few million' tonnes of alumina refinery capacity by 2010.

'We will also double our aluminium smelting capacity so that at least 50 per cent of our alumina output will be used by our smelting plants,' he added.

The company's annual alumina refining capacity is expected to reach 8.5 million tonnes by the end of the year, by which time its aluminium smelting capacity will exceed 1.5 million tonnes.

Alumina is an intermediate product refined from bauxite, before being smelted into aluminium, a metal used in the production of packaging, vehicles, aircraft and construction materials.

It takes two tonnes of alumina to make a tonne of aluminium.

Chalco, the world's second largest alumina producer, supplies a little more than half of China's alumina demand, with the rest imported.

The company is also the nation's largest aluminium smelter in a fragmented industry with more than 150 producers.

China's aluminium smelting industry is suffering from overcapacity, producing more than 10 million tonnes this year, against expected output of about 7.5 million tonnes.

However, Mr Xiao said the actual operating capacity was less than 10 million tonnes, as 1.8 million tonnes came from highly polluting plants that have been ordered by the government to cease operation.

Some plants have also been unable to operate properly because of a lack of alumina and inadequate power. About 80 per cent of the nation's aluminium smelters have been sustaining losses due to rising power tariffs and alumina costs.

'But many have borne the losses and continue to produce,' Mr Xiao said.

'As long as they have cash inflows, they lose less money than leaving the plants idle. Others have their own power plants so their electricity bill is 20 per cent lower than the norm.'

Electricity accounts for about 35 per cent of an aluminium smelter's operating costs.

Chalco is in talks to buy smelters with combined annual capacity of about 350,000 tonnes. Potential acquisition targets must have a gross profit margin of at least 14 per cent.

'Our expansion in aluminium smelting will be quicker than our alumina business in the next five years,' Mr Xiao said.

'Overcapacity in the power industry will be a good opportunity for us to expand.'

The central government expects the power sector to be in surplus by 2007.

It will gradually introduce power price competition over the next few years, which will help bring down tariffs as overcapacity is needed to introduce competition.

To tap overseas resources, Chalco is conducting a feasibility study to develop bauxite resources in Vietnam. It will join China Nonferrous Metal Mining and Construction and the Vietnam government to build a refinery with annual capacity of 1.6 million to two million tonnes of alumina, much of which will be sold to the mainland.

'We expect to come to a conclusion on the project's development by the second half of next year,' Mr Xiao said.

The company will submit early next year a bid for a bauxite development project in Queensland, Australia. The bauxite is expected to be refined in Australia before being shipped to China.

In Brazil, Chalco expects to complete a feasibility study this year to build a large alumina refinery with Companhia Valedo Rio Doce. It is expected to come on stream in 2008.