ON APRIL 15, executives of the world's third-largest alumina producer, Aluminum Corp of China (Chalco), were happy to announce that the company had met the net profit promised to investors for last year at the time of its initial public offering. Chalco recorded earnings of 1.58 billion yuan (about HK$1.48 billion), 2.3 per cent more than the minimum 1.55 billion yuan it forecast in the prospectus for its listing last December. At first glance, Chalco's management has good reason to cheer. Having registered a 37.1 per cent decline in net profit and a 9.1 per cent fall in turnover to 16.6 billion yuan compared with 2000, Chalco performed well compared to the global industry leaders in tough times. The global economic downturn has seen aluminium consumption plunge almost 7 per cent in the West, the worst slump since a recession in 1981, according to Bear Stearns. The average London Metal Exchange aluminium price decreased by 7.8 per cent year on year to US$1,454 a tonne last year. United States-based Alcoa, the world's No 1 aluminium company, reported a net profit plunge of 38.8 per cent last year to US$908 million (the equivalent of about 7.44 billion yuan), although sales dipped by a mere 0.3 per cent. Alcan of Canada - the world's second largest aluminium producer - recorded a 99.1 per cent plunge to US$5 million, largely due to US$446 million in extraordinary charges covering asset write-downs, a plant closure and associated rationalisation costs. Chalco's shares surged to a high of HK$1.99 in late February from its offer price of HK$1.38, driven by expectations of a global economic recovery. However, they have fallen sharply in the past week, on concerns of high aluminium inventory and a potential rise in supply as major producers bring idle capacity back on line. Yesterday, Chalco shares plummeted 6.8 per cent to HK$1.36 - below its offer price for the first time this year. Chalco was formed in September last year by the merger of 12 state-owned alumina (an intermediate product) and aluminium producers. Its primary focus is on upstream production - the refining of bauxite into alumina - which contributed 63.6 per cent of its core-business operating profit last year. The smelting of alumina to produce primary aluminium produced the remaining 36.4 per cent of profit. Chalco ranks third among the world's top alumina producers, and seventh as a primary aluminium maker. As the sole alumina producer in China, Chalco has been selling its product at a high premium to international prices. According to the company, the average external selling price of its alumina was 2,218 yuan, or about US$268, a tonne in the first quarter of this year, compared with an international average of US$154 to US$158. Liang Zhongxiu, executive director and senior vice-president of Chalco, said the premium reflected value-added tax, transportation costs and tariffs that alumina importers had to pay. Even then, Chalco's price was still about 145 yuan a tonne (or 7 per cent) higher than import prices. The average price of imported alumina plunged 46.8 per cent last year to 2,073 yuan a tonne, against a 35.1 per cent drop in Chalco's alumina price to 2,218 yuan, according to the company. The price premium reduced Chalco's share of the domestic alumina market from 70 per cent in 2000 to 65 per cent last year, as alumina imports surged 78.2 per cent to 3.32 million tonnes. Mr Liang sought to allay fears that the company's market share might continue to fall this year. He said Chalco would seek to keep its alumina selling price on a par with that of imports this year. In addition, Chalco had advantages over importers. 'We enjoy a geographical advantage in the domestic market and we have established long-term relations with local aluminium smelters,' he said. 'Local smelters prefer buying alumina from us because they want to maintain a stable supply.' What Mr Liang did not mention was that the company was under pressure to keep its alumina selling prices relatively high last year to meet its 2001 profit forecast. 'Since [production] volume was fixed at 4.7 million tonnes, if they adjusted the prices according to international prices, then they wouldn't have been able to meet the target,' HSBC Securities (Asia) analyst Geoffrey Cheng said. Despite Mr Liang's reassurances over the company's pricing policy and geographical advantage, Mr Cheng noted imports had risen 38.5 per cent year on year to 1.08 million tonnes in the first quarter this year. He said this was mainly due to aluminium producers stocking up on alumina amid rising aluminium prices. He forecast the average selling price of Chalco's alumina would decline further this year to about 1,652 yuan per tonne (exclusive of value-added tax), representing a drop of 12.8 per cent from last year. The projection took into account the effect of a fall in alumina import tariffs from last year's 18 per cent to this year's 12 per cent, as well as an expected narrowing of the price premium against imports. Still, the impact of any further price fall could be offset by Chalco's planned increase in production volume and cost savings. According to management, Chalco plans to produce 4.9 million to five million tonnes of alumina this year (up from last year's 4.7 million) and 720,000 tonnes of aluminium (up from last year's 710,000 tonnes). It also has a two-year target to cut its unit production costs for alumina to US$120 per tonne from last year's US$139, and for aluminium to US$1,000 per tonne from last year's US$1,060. Analysts expect a 12.1 per cent year-on-year rise in Chalco's net profit to 1.78 billion yuan this year, according to a Thomson Financial First Call poll of seven brokerages. Being a monopoly in the alumina sector and controlling 20 per cent of China's aluminium production, Chalco is protected by Beijing's preferential policy. Last October, the State Economic and Trade Commission imposed barriers which allow alumina imports only when they are destined for smelters with good environmental records and annual production capacity of more than 50,000 tonnes. Chalco president and chief executive Guo Shengkun said the new regulations had had an impact on alumina imports. However, the 38.5 per cent rise in alumina imports in the first quarter of this year suggests market forces have overcome administrative power. Mr Cheng believes if this trend continues for the next three quarters, Chalco might have difficulty in meeting its five-million-tonne alumina sales target, assuming domestic consumption reaches eight million tonnes this year. Last year, domestic alumina consumption surged 18 per cent year on year to 7.22 million tonnes. While this year appears tough for Chalco due to depressed international metal prices and keener competition from imports, some analysts said two positive factors might cheer its prospects. First, international alumina and aluminium prices were already bottoming out and were likely to rebound in the second half as the world economy recovered. Second, China remained the world's fastest-growing market and a shortage in domestic supply of alumina was expected to continue beyond 2005. Graphic: alum26gbz
