Capacity closures bring down Hongqiao Group’s 2017 net profit

China’s aluminium giant and the world's biggest aluminium producer Hongqiao Group Ltd announced its results for 2017 on Friday. The company reported 25.3 per cent drop in its 2017 net profit due to capacity shutdowns and rising raw material costs.

In a filing to the Hong Kong stock exchange, the company reported a full-year net income of RMB 5.12 billion ($811 million), down 25.3 % from RMB 6.85 billion in the previous year.  However, revenues increased 52 per cent to RMB 93.3 billion.

Hongqiao attributed the fall in profit primarily to the production capacity closure following to Beijing’s direction. The filing referred to the mandatory capacity cut as “the group's response to the relevant policies and plans for the supply-side reform of the aluminium industry.

Hongqiao did not divulge a quarterly profit figure for 2017. It announced in October its first-half 2017 profit fell by 55 per cent YoY to RMB 1.482 billion. This followed an RMB 3.36 billion write-down because of caused by capacity closures.

It is noteworthy that Hongqiao had to permanently close 2.68 million tonnes of annual smelting capacity in 2017, as a part of supply-side reforms. This capacity cut drives actually drove up SHFE and LME prices in 2017. Analysts highlighted the fact that the company was largely exempted from production cuts during northern China's winter heating season which ended on March 15, while other smelters had to close capacity during that period. Despite the capacity closure, Hongqiao’s aluminium production rose 24.9 per cent to 7.5 million tonnes in 2017.

Aluminum Corp of China or Chalco, China's biggest state-run producer of aluminium reported 87 per cent drop in fourth-quarter profits as the Shanghai aluminium price rally lost momentum in late 2017.