China aluminum capacity cuts won't solve glut

China has temporarily halted 1 million metric tons a year of primary aluminum capacity so far this year and could cut a further 300,000 tons capacity in the country's east before year-end if metal prices remain low, but this won't solve the global industry's overcapacity problems, CRU consultants specializing in the Chinese aluminum sector said in an interview Tuesday.

The Asian giant isn't contributing on a net basis to help solve the world aluminum overcapacity problem, because it continues to build new smelter capacity in Xinjiang in the country's northwest, where abundant coal makes energy cheaper than in other provinces and some new smelters gain tax incentives, said Ling Wong and Yanchen Wang, senior CRU consultants during CRU's World Aluminium Congress.

China is currently producing at a rate of 24 million tons a year of aluminum on an installed capacity of 28 million tons, Ms. Wong said.

"Its share of global aluminum production will continue to rise, from about 46% now to over 50% by the end of the decade, when it could reach 42 million tons, which is quite scary," she said. "After that, capacity will stabilize."

Russian aluminum producer Rusal and the U.S.'s Alcoa Inc. this month announced they plan new capacity cuts in an effort to slim down record-high global inventories and support aluminum prices that have fallen by more than one-third since peaking in 2011. According to CRU Strategies' managing consultant Colin Pratt, the Rusal and Alcoa cuts may take 1 million tons of capacity off the market but a further 2 million tons of permanent smelter closures are needed to solve the immediate oversupply problem.

"We need more cuts to draw down the inventories of 12 million tons, of which 6 million tons are reported and the rest estimated," Mr. Pratt said.

Some Chinese smelters have cut capacity this year because they're no longer receiving the power subsidies they got last year, Mr. Wang said. Further cuts will come if metal prices fall below a certain level, he said.

"They're using the Shanghai futures market price, which is currently at 14,500 renminbi per ton," Mr. Wang said. "If this goes below 14,000 renminbi, they'll cut."

While some major aluminum smelter operators, such as Chalco and the China Power Investment, are state-owned, there are many privately owned smelters that are taking their own decisions on whether they should continue operating, the CRU China specialist said.

"A lot of smelters (in China) are losing money but are still operating, because to shut and restart involves a lot of costs," he said. Local demand for aluminum continues strong, he said.