Aluminium prices affected by oversupply, Chalco says

PUBLISHED : Wednesday, 31 March, 2010, 12:00am
UPDATED : Wednesday, 31 March, 2010, 12:00am

Aluminum Corp of China (Chalco) warned yesterday that aluminium prices will be held in check by oversupply, but nevertheless said it is raising its capital investment by 36 per cent and predicted a return to profitability.

Chalco last week posted a fourth-quarter net loss of 1.1 billion yuan (HK$1.25 billion) - far worse than analyst estimates of a 1.4 billion yuan profit - because of higher than anticipated production costs. The company said it expects to return to the black in the first quarter of this year.

Low cash flows last year due to a 4.64 billion yuan annual net loss forced the company to cut its capital expenditures by 46 per cent to 10.7 billion yuan.

This year, the nation's largest producer of aluminium has budgeted 14.6 billion yuan in capital expenditures. Of this amount, 3 billion yuan has been earmarked for overseas projects.

Chalco has a bauxite and alumina project in Australia and is negotiating aluminium-smelting plants in energy-rich Saudi Arabia and Malaysia.

Alumina is an intermediate product produced from bauxite and is smelted into aluminium.

The company also plans to build 2.3 million tonnes of annual alumina production capacity in Zunyi, Guizhou province, Chongqing and Xinxian in Shanxi province, chairman Xiong Weiping said.

'These projects are located in cost-competitive regions and will serve to replace capacity in inefficient plants we will shut down,' he said.

Chalco plans to close one million tonnes of annual alumina capacity out of its 11 million total capacity, although Xiong did not give a time frame or say which plants will be closed.

Replacing outdated and energy-inefficient facilities with new ones is key to improving profitability amid global oversupply.

Chalco predicted that 82.8 per cent of the world's 100 million tonnes of alumina capacity will be utilised this year, and that output will exceed demand by 4.4 million tonnes.

As for aluminium, the company expects 81.6 per cent of the global 51 million tonnes of capacity to be used with production 2.2 million tonnes higher than demand.

'There is still some idle capacity waiting to resume production as the economy continues to recover,' Xiong said. 'The huge inventory sitting in the Shanghai Metals Exchange means any aluminium price upward momentum will face tremendous pressure.'

Aluminium prices averaged US$1,664 a tonne last year on the London Metal Exchange, down 35.3 per cent from US$2,571 in 2008. Chalco forecasts the metal to trade between US$2,000 and US$2,400 a tonne this year.

Chalco expects to save 53 million yuan a month from lower-cost power procurement at five plants - which make up 25 per cent of its total aluminium capacity - under a direct power purchase scheme agreed with local power distributors.

It also aims to cut costs by increasing the percentage of bauxite it mines itself to about 85 per cent from 66 per cent currently, Xiong said without giving a timeframe. Company-mined bauxite, which is 20 per cent cheaper than third-party procurement, exceeded 10 million tonnes for the first time last year.

Chalco vice-president Liu Xiangmin said the company aims to start production at three bauxite mines, each with half a million tonnes of annual capacity. It also plans to invest in more coal or hydro-power supported aluminium projects to cut costs.

In the doldrums

Higher than expected production costs were blamed for loss

The company's net loss for the fourth quarter came to, in yuan: 1.1b yuan