China Hongqiao Group to cut outdated capacity on the back of government’s directive

According to a news report from Bloomberg, China Hongqiao Group, the biggest aluminium producer in China is curtailing outdated capacity on the back of government’s strict measures against illegal production. The company, a subsidiary of Shandong Weiqiao Pioneering Group Co, however, has not divulged any detail regarding the scale of curtailment or the time or date of such an action. Unnamed sources said that Weiqiao’s aluminium business started cutting 250,000 metric tons of annual capacity from Tuesday, June 20.

China has started taking strict measures this year to cut capacity to reduce excess supply and to put a curb on pollution. China’s top economic planning agency issued an order in April to close smelters that violate environmental guidelines.  It was also announced in the beginning of the year that alumina and aluminium capacity to be cut during the peak pollution season over the winter. China’s total smelting capacity last year was about 40 million tons.

Hongqiao’s move however is a positive development in the sense that it seals the company’s commitment towards government’s directive and gives the market confidence that China’s biggest producers are actually curbing capacity, said Liu Xiaolei, an analyst with SMM Information & Technology Co.

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Jack Shang, an analyst at Citigroup Global Markets Asia said,“3.1 million tons, or 8 percent of total operating capacity, is without proper approvals, hence we expect more production cuts in the coming months.”  He expected the winter capacity cut to further tighten the China aluminium market.

It is to be noted that Aluminium on the London Metal Exchange has outperformed other metals this year on the prospect of Chinese cuts, gaining 12%. It rose 0.3%to $1,892 a ton on Wednesday, June 21. Aluminum Corp. of China Ltd., the nation’s second largest smelter, advanced as much as 2.2% in Shanghai stock market and Yunnan Aluminum Co. surged as much as 4.4% after the news had broke out.