China's new smelters set to swamp effort to dam aluminium flood

Aluminium smelters are set to open in China at a faster pace than producers there and worldwide shut loss-making plants to tackle a glut that keeps the metal's prices weak.

So far this year, analysts estimate cutbacks in aluminium production have totaled as much as 700,000 tonnes in China, the world's biggest consumer and producer, after prices shed more than 10 percent since January.

That alone could bring an over-supplied market into balance - the global market surplus is forecast at 687,455 tonnes this year and 747,000 tonnes in 2014, according to analysts polled by Reuters.

But China is on course to add around 4 million tonnes of new capacity this year, much of it with lower cash costs by using cheap energy sources, according to Janet Kong, managing director of research at China International Capital Corp. in Hong Kong.

Analysts say there could be years more of market surpluses, although the industry is clearly under strain.

"The pain is definitely there," said Metals Strategist Michael Widmer at Bank of America/Merrill Lynch in London.

Benchmark three-month aluminium on the London Metal Exchange has given up about a third of its value since touching a high of $2,803 a tonne in May 2011 and is the weakest performing base metal on the exchange over the past four years.

Cutbacks in China are estimated at 500,000 tonnes of annual capacity, mostly among small and mid-sized smelters in Henan and South China, according Kong at China International Capital Corp.

Paul Adkins of Beijing-based aluminium consultancy AZ-China pegs the Chinese cutbacks higher, at 700,000 tonnes.

"Going forward we do expect more cutbacks ... and delays in new capacity construction if prices remain low. That said, we don't expect the market to tighten as there is no lack of (new) capacities," Kong said.

China may cut an additional 500,000 tonnes this year, but this would be cancelled out by the 4 million tonnes of new capacity, she added.

This will allow large Chinese producers to keep some older loss-making smelters in business because their new operations lower their average costs nationwide, she added.

"The net reality is that China's productive aluminium capacity continues to increase quite substantially, well beyond the rise in demand that the market requires," said analyst Duncan Hobbs at Macquarie in London.

Global producers are trying to work with Chinese firms on output cuts and some major ones held a meeting with large Chinese smelters in China two weeks ago, but failed to reach any agreement, a source with direct knowledge of the meeting said.

In the longer run, China's environmental protection efforts may help reduce capacity.

Wilson estimates that about three-quarters of European Union smelters are loss-making based on the LME price alone, but after adding in premiums, only a quarter are in the red.

"As long as you've got the financing deals and the high physical premiums in place, the smelters and the companies can at least survive, barely, but they can survive," said Widmer.