Overcapacity plagues aluminium sector
Despite losses, smelters are ignoring Beijing's orders to shut inefficient plants amid pressure from local governments
Since 2003, Beijing has issued at least three policy circulars ordering the aluminium industry to correct its overcapacity problem, caused by local governments' pursuit of their own interests.
Until the central government finds an effective way to motivate local officials to change their penchant for investment-led economic growth and to launch a crackdown that bites, analysts say, overcapacity will not be resolved despite strong growth in domestic demand for the lightweight and versatile metal.
"It is a big challenge for the authorities to untangle the power of [vested interests] and to take back some sort of control or reform those industries," said Mark Pervan, the head of commodity research at ANZ Investment Bank. "The local governments don't appear to get the message that you need to shut some inefficient capacity."
Overcapacity has plagued not only the aluminium sector but also copper and steel smelting. All three grind on with low profits or losses as falling product prices, rising energy and environmental protection compliance costs and falling supply of domestic raw materials erode earnings.
The situation prompted the Ministry of Industry and Information Technology to issue on July 25 an edict for 1,433 firms in 19 energy-intensive and polluting industries to shut down and dismantle outdated and inefficient plants by year-end.
The ministry said this was the first batch of firms and projects, without giving the eventual scale of the crackdown. Only nine steel firms were ordered to close down 2.8 million tonnes of annual capacity, a drop in the bucket compared with the steel sector's annualised output of 786 million tonnes in the first half.