Chalco forced into another price cut

PUBLISHED : Friday, 01 September, 2006, 12:00am
UPDATED : Friday, 01 September, 2006, 12:00am

The alumina giant is caught between a rock and a hard place as it seeks to counter the effects of global oversupply

Aluminum Corp of China (Chalco), the world's second-largest alumina producer, has cut its spot alumina price by 22.4 per cent - the second reduction it has made in a month - to reflect falling prices in the global market.

The Beijing-based company slashed its alumina spot sales price from 4,900 yuan per tonne to 3,800 yuan, making it equal to the current imported alumina price at the mainland's ports.

The new price is effective from today.

'The price cut is faster than market expectation but it's good that it did the adjustment in one cut to match the market price,' said Geoffrey Cheng, analyst at Daiwa Institute of Research.

Mr Cheng expects Chalco's shares to come under heavy selling pressure in the short term.

Chalco reduced its alumina price by 13.3 per cent on August 7, its first cut in more than two years but even then the price was still higher than that of the market.

The international price of alumina, the raw material used to make aluminum, has dropped 56 per cent to US$275 a tonne since March, according to data from Metal Bulletin. This has been caused by a surge in supply after aggressive capacity expansion in China.

Wang Feihong, senior metals analyst at Beijing Antaike Information Development, a government non-ferrous metals industry research house, expects Chalco to further cut its price.

'I think prices will come down further in the next six to 12 months as domestic supply is rising quickly,' he said.

He added that this rising supply would also drag down international spot market prices as China was the largest spot market buyer.

China's domestic alumina production rose 51.6 per cent to 5.93 million tonnes in the first six months of this year, driven by additional capacity from new producers.

Jeannette Sim, an analyst at ABN Amro, said in a report: 'The collapse in alumina prices may also lead to further increases in aluminium production. While many aluminium smelters were unprofitable in early 2006 due to high alumina prices, the trend reversal could now prompt a revival in smelting operations.'

Ms Sim has a 'sell' rating on the stock with a target price of HK$4.38.

Chalco, which is also the mainland's largest aluminium smelter, is increasing its smelting capacity to raise internal utilisation of alumina to between 70 per cent and 80 per cent from 36 per cent last year, in an attempt to reduce its reliance on alumina sales.

But many analysts believe any rise in earnings from the aluminium business will not be enough to offset the drop in alumina business.

Chalco, which last week reported a 90 per cent surge in net profit to a record 6.74 billion yuan in the first half, is expected to post a profit of 11.74 billion yuan for the full year from last year's 7.02 billion yuan and slip back to 8.80 billion yuan in 2007, according to an estimate of 21 analysts polled by I/B/E/S.

Its shares fell 1.94 per cent to HK$5.55 yesterday before the price-cut announcement.