Aluminum Corp of China (Chalco), the world's third-largest alumina refiner, has admitted the preferential treatment it enjoys from the mainland government will eventually be phased out. However, Chalco said its planned cost-cutting measures would help offset the negative impact from the expected end of Beijing policy protection. Executive vice-president Xiong Weiping said the company enjoyed a discount in its electricity procurement of two fen (about 1.9 HK cents) per kilowatt hour (kWh), but this would gradually disappear as Chinese power companies become more market-oriented in their pricing practices. Power costs accounted for about 37 per cent of its cost of alumina sold last year and about 34 per cent of its aluminium sold, according to UBS Warburg. The brokerage estimated that for every fen change in its per kWh electricity cost, its net profit would change by 7 per cent. This implies Chalco's bottom line has been bolstered by about 14 per cent by the discount. Chairman Guo Shengkun yesterday also said such preferential treatment would not continue but offered no time frame for its phasing out. Import barriers on alumina, which indirectly allow Chalco to sell alumina at a premium to international prices, will also be gradually eliminated in the future, he added. Shortly before Chalco decided to proceed with its listing early this month, Beijing imposed a policy stipulating that all alumina imports be approved by the State Economic and Trade Commission. Although seen by some analysts as a move to boost sentiment towards Chalco's share offering, Mr Guo said the move was not specifically aimed at discouraging imports, but rather to stamp out smuggling and import tariff evasion. He expected the policy would be removed when market order was restored. Meanwhile, China's accession to the World Trade Organisation next month will see import tariffs on alumina fall from 18 per cent to 8 per cent by 2004. This is expected to enhance competitiveness of alumina exports to China, which accounted for 30 per cent of domestic consumption last year. Australian producers are the biggest threat to Chalco, whose average refining per-tonne cost in the first half of this year was US$156, compared with about US$122 of its Australian competitors, fund managers said. Australia provided 86 per cent of China's alumina imports last year of 1.9 million tonnes. However, Mr Guo said even if import tariffs drop to zero, imports would still be liable to transportation, packaging and port fees, so Chalco would still have a US$30 per tonne price advantage. A three-year cost-cutting programme, which is expected to see total savings of about US$330 million, would help enhance Chalco's competitiveness, he added. Mr Xiong said Chalco was targeting to cut its per-tonne alumina production cost by 23 per cent and trim aluminium production costs by 8.3 per cent. Mr Guo said Chalco would not rule out adjusting its aggressive 17.8 billion yuan capital expenditure plan for 2001-05, should global oversupply persist. In the first half of this year, China saw a sharp increase in imports due to a global alumina oversupply. Mr Guo said the glut was expected to be relieved due to the closing of some production facilities overseas.