Chinalco on the way to become world’s biggest aluminum producing company

Following Beijing's initiatives that saw successful transfer of assets between a cash strapped power generation group, the State Power Investment Group (SPIC) and a loss-making alumina and aluminum smelting group Aluminum Corp of China Ltd., the latter is set to become the world’s biggest aluminum company by production, leap-frogging from third place over the US’s Alcoa, Inc.and Russia’s UC RUSAL Plc.

According to a recently published report, Chinalco will add 2.7 million metric tons of annual smelting capacity to its present 3.8 million metric tons when it inherits SPIC’s smelters, easily pushing it ahead of Rusal and Alcoa.

For state-sponsored and directed SPIC, the move makes good sense. The aluminum smelters were reported to be mostly loss-making and the group only owned them following the merger last year of smaller power generation companies and China Power Investments.

Along with most of Chinalco’s assets, these smelters drew their power from the national grid which, earlier allowed the state to subsidize power prices. Many of these older smelters are now paying much more than the new generation of smelters built in the Northwest province of Xinjiang on low-cost thermal coal deposits and, hence, low cost local power supply.

Most, if not all, of Chinalco’s aluminum smelters are now loss-making and adding more to the mix will further add to their cost burden. To what extent Chinalco has agreed to compensation from Beijing to help cover the costs of closing these loss-making plants remains to be seen.

If the rate of closures within the company picks up sharply, it will suggest the authorities accept it is a bad deal for the company and they need help sorting them out. With overcapacity likely to be an ongoing problem in China, the problem isn’t going to be resolved without closures.

For SPIC, the transfer will free the debt-laden firm to concentrate its capital and borrowings on meeting the governments targets for more nuclear power plants. China has 28 nuclear power plants under construction and plans to build dozens more at an estimated cost of $150 billion. This is stretching the financing ability of its two largest nuclear companies, China National Nuclear Power Co Ltd and China General Nuclear Power Corp. Opening the sector to other players should help finance the nuclear build-out.