China's aluminium production shot up in June

China's production of aluminium cranked up several gears last month to an annualized 22.42 million tonnes. It was the second-highest run-rate ever, eclipsed only by what may have been a holiday-distorted output figure in February.

The world's largest producer churned out 10.54 million tonnes of the light metal in the first half of this year, according to figures from China's Nonferrous Metals Industry Association published by the International Aluminium Institute (IAI).

That represented year-on-year growth of almost 11 percent, pretty much matching last year's pace.

Annualized production jumped by 1.63 million tonnes in June alone. Although China's monthly production figures can be volatile, there is no denying the direction of the trend.

And this from a country where, to quote from U.S. producer Alcoa's quarterly conference call, some 41 percent of all smelters may be financially "under water".

The problem, Alcoa chairman and chief executive Klaus Kleinfeld complained, is that China's aluminium smelter sector is "living on a different universe".

The real problem for the likes of Alcoa, though, is that so too are many smelters in the rest of the world.

High-cost smelters have indeed been closing in China, just not at the same rate as new capacity has been ramping up in northwestern provinces such as Xinjiang.

Analysts at AZ China, which specializes in the Chinese aluminium smelter sector, estimate that somewhere close to two million tonnes of annual capacity may have been curtailed over the first six months of this year.

That should give some perspective on the scale of the build-out taking place in the northwest, where a new generation of aluminium producer is capitalizing on stranded coal reserves for the supply of energy, the key cost input for making the metal.

AZ China estimates that about five million tonnes of new capacity is going to come on line in China this year, although it will not necessarily translate into that amount of metal because big smelters need time to build up to full-capacity run-rates.

But even as those newer, lower-cost smelters come on stream, many older higher-cost plants in China's central and eastern provinces continue to defy cost-curve economics.

They can do so largely because of a helping hand from local governments, which don't want to see major contributors to GDP and taxes disappear into oblivion.

Yet again there is talk of widespread power subsidies.