Aluminium stockpiling fund gives glimpse of China metals reforms

China's plans to set up funds to manage coal and ferrous metal capacity closures and stockpiling schemes offer nervous markets some clarity on the likely future make-up of the country's sprawling and predominantly state-run metals and mining industries.

As the world's largest producer of aluminium, steel and other metals, and the biggest consumer of copper and iron ore, China is crucial to global metals markets which have slumped in the past year as Chinese industrial demand growth slowed.

China's slowdown has hit revenue at global miners such as BHP Billiton and Rio Tinto, and the market is keen to know what China plans for its own state-run mining and metals giants - many of which have kept producing even as prices drop below the cost of production.

After weeks of talks between government officials and leading metals producers, Beijing looks set to take a direct approach to managing capacity cuts and layoffs in coal and steel. It will provide smaller-scale financing deals to groups of producers of non-ferrous metals, such as aluminium, for stockpiling and capacity cutback initiatives.

On Thursday, state media reported that Beijing will allocate 30 billion yuan ($4.56 billion) over the next three years to support the closure of small and inefficient coal mines, and re-deploy some 1 million workers. Similar measures are expected to be unveiled for the steel sector. Both industries have huge over-capacity.

Last week, six big aluminum producers - Aluminum Corp of China (Chinalco), State Power Investment Corp, Yunnan Aluminum, Jiugang Group, Jinjiang Group and Weiqiao Aluminum & Electricity - agreed to set up a new company to handle a proposed stockpiling scheme and to coordinate and monitor production levels across the group, said industry sources.

The aluminium stockpiling program is part of a bigger plan proposed late last year by smelters and the state-controlled China Nonferrous Metals Industry Association. The producers have been in talks for several weeks with state-owned China Development Bank (CDB) for loans, and the establishment of the new joint company was a necessary step to access funding, said the industry sources.

The CDB loans could also help cover the cost of closing capacity at cash-strapped state-owned aluminium smelters, said a smelter executive briefed on the stockpiling program.

Though severe over-capacity has been identified as a major problem across a range of industries, loss-making firms are reluctant to exit, saying they cannot afford to settle debts and staff redundancy payments.