Aluminium smelters in Xinjiang province to add only about a half of the original capacity expansion plans

Aluminium smelters in China's Xinjiang province, which aim to become a key production hub of the metal, will add only about a third to half of the capacity expansion originally planned for 2012 as low metal prices and costly power cripple the industry, analysts say.

The delay in adding as much as 2.6 million tonnes of aluminium capacity this year in China, the world's top producer and user of the industrial metal, could ease pressure on prices as smelters worldwide struggle to cope with dwindling margins.

"Out of the 3 million to 4 million tonnes per year of new aluminium production earmarked for Xinjiang in 2012, we may only see 1.3 million to 1.4 million tonnes come online," said Liang Lijuan, deputy manager of metal products at COFCO Futures.

While gloomy economics has a part to play in the drop in global aluminium prices over the years, overcapacity in China, estimated at 300,000 tonnes in 2011, has also been blamed.

One reason why few new smelters are coming online is low domestic prices, which must stage a convincing rebound to above the break-even level of 16,000 yuan ($2,500), said analysts who estimated that between 1.7 million and 2.6 million tonnes of the year's new capacity would be pushed back.

But the cut in Xinjiang's production plans is only temporary, with the province scheduled to post total aluminium production of up to 12.7 million tonnes by 2015, according to recent statistics presented by Minmetals Nonferrous Metals' senior analyst Wang Feihong.

The figure is about 37 times more than Xinjiang's total production of 294,100 tonnes in 2011, China's State Council says on its website.

"I believe most of these delayed projects in Xinjiang will only start producing in 2013 or 2014, when their captive coal-fired power plants begin operation and generating cheap electricity," said COFCO Futures' Liang.

While aluminium smelters take around a year to build, power plants can take from 1.5 to 2 years to install, depending on their sizes and technologies involved. The time lag means that many smelters are short of power to start their projects, unless they resort to buying costly power from the state grid.

A combination of challenges ranging from sputtering domestic and overseas demand to a production surplus, weak prices and high electricity costs forced many smelters in China's current top-producing province of Henan to idle about 700,000 tonnes of capacity until the local government, keen to recoup dwindling tax revenues, gave them subsidies, allowing many to restart.