Aluminum Corp of China (Chalco), the world's second-largest alumina maker, has won approval to build an 800,000-tonne-capacity alumina project in Chongqing involving a total investment of 4.27 billion yuan.
The National Development and Reform Commission, the top economic planner, approved the plant in Nanchuan district on December 27, according to a statement on the website of the State-owned Assets Supervision and Administration Commission.
The development, which will include bauxite mines and power plants, will be the city's single largest industrial investment and could generate 4.5 billion yuan of sales a year after it is commissioned in three years, mainland media reported.
China's largest aluminium producer has set aside 60 billion yuan to boost production capacity in both alumina and aluminium between last year and 2010, chairman Xiao Yaqing said in August last year.
The Beijing-based company aims to boost its annual production capacity for alumina, the base ingredient of aluminium, to between 13 million and 14 million tonnes by 2010 from 8.3 million tonnes in 2005 and more than triple its annual aluminium smelting capacity to five million tonnes from 1.5 million tonnes in 2005.
Chalco is building another two 800,000-tonne-capacity alumina projects in Zunyi, Guizhou province and phase III of a development in Guangxi.
Last week, investment bank JP Morgan cut its rating on Chalco to 'neutral' from 'overweight' on expectation that global aluminium prices and spot prices of alumina will fall this year and next as supplies exceed demand.
Positive factors such as firmer than expected aluminium prices, Chalco's strong aluminium capacity growth and the prospect of an A-share listing, 'have already been priced in' as the stock jumped more than 50 per cent in the past few months, JP Morgan analysts Zhang Feng and Emily Zhang said.
JP Morgan expects prices of aluminium, the main driver of Chalco's earnings, will decline on the London Metal Exchange by 11 per cent this year and 17 per cent next year.
The bank also expects spot alumina prices, which have fallen by 60 per cent from their peak last March to about US$230 a tonne, to remain under pressure in the next two years because of China's rapid capacity expansion. Further downside should be limited as the prices are already below operating cost.
Chalco's earnings will fall as well. Despite strong growth in aluminium production, this might not be able to offset the drop in aluminium and alumina selling prices, JP Morgan said.
It forecast Chalco's earnings would slump by 27 per cent this year and by 34 per cent next year.
JP Morgan maintained its six-month target price of HK$7.40 on Chalco.
Shares in Chalco dropped 4.66 per cent to close at HK$6.95 yesterday.