* China holds key, could make up supply shortfall
* Vast inventories to erode gradually
By Karen Norton
LONDON, Jan 21 (Reuters) - Aluminium producers continue to draw up plans for more large smelter projects even while the world is awash with the metal used in cars and construction.
But even more plants need to start up by the middle of the decade if output is to satisfy the expected return to healthy demand growth and offset likely closures in high-cost regions.
China may plug the gap as it has done in the past, but some market watchers are cautious. Others take the view though that when it comes to the crunch supply will be ample.
Last month, Rio Tinto Alcan, a unit of global mining giant Rio Tinto, said it was exploring a $2.5 billion investment in Paraguay, involving a 480,000 tonnes per year aluminium smelter. It could be on line in 2016.
Other recent plans include one in Malaysia and another in India. But as yet there are not enough committed projects in the medium to long term.
"There is excess capacity through to 2012 and new projects are sufficient. But after that additional projects are needed, ones that are not yet committed," said independent consultant James King.
"By 2013 we'll be back to not having surplus capacity...by 2015 we could need 3.0 million tonnes beyond what we've got," he added.
Given the trend towards bigger new smelters it might only take a few more projects to be firmed up. Top producer China could still make the difference if the growth seen in recent years continues. But some analysts are confident regardless that supply will not pose difficulties.
"Aluminium has never had a problem with supply particularly lagging demand growth. Over the long term that's why the price has been one of the poorest performers," said David Wilson, director of metals research at Societe Generale.
Outside China, the Middle East has been the main focus of global smelter capacity rises.
Earlier this month, state-owned Emirates Aluminium (Emal) started producing at its new smelter in Abu Dhabi. By the end of 2010 it is expected to reach 700,000 tonnes per year (tpy).
Analysts feel attention may now switch increasingly to other regions with access to cheaper power, such as North Africa, South-East Asia and parts of South America.
If China's rapid growth continues it could resolve the predicted supply shortfall. But there are fears it may not.
Western producers may not want to wait to find out, but they would need to get a move on given the lead times for building a smelter once a go-ahead decision is made.
"There are lots of projects that could be taken forward, but they're still a long way from happening," said King.
ALUMINIUM MAJORS
Major producers Alcoa and Rio Tinto Alcan have seen capacity contract in higher cost regions such as Europe and the United States. That trend is set to persist and they continue to look elsewhere to lower costs and retain or boost market share.
"The smart money is on the fact that most of Europe's smelters are going to shut and I see plants in the U.S. Pacific Northwest closing in the next five years," said independent consultant Angus MacMillan.
While China is expected to help offset such losses output there could be curbed as environmental pressures intensify. The bulk of its capacity uses polluting coal-fired electricity.
The Chinese government has also said in the past it will move to curtail over-capacity, although analysts are sceptical.
This year alone capacity in the world's top producer is expected to jump 10 percent to 22 million tonnes annually, according to state-backed research group Antaike. Still more projects are on the drawing board, but details are scant, which adds to uncertainty.
With inventories of aluminium held in London Metal Exchange (LME) warehouses near record highs at 4.6 million tonnes it perhaps seems odd to be contemplating possible supply shortages.
But stocks are expected to start to erode gradually from the end of this year as producers remain disciplined and maintain output cutbacks.
In any case, companies obviously have to look beyond the present and prepare to cater for a return to healthy consumption growth levels.
King predicts double digit increases in global demand this year and next, followed by around 7.0 percent rises in 2012 and 2013.
"Modest expansions will not add up to enough. Some rather grand projects have to be put forward," he said.
(Edited by Sue Thomas)
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