Chinese aluminium smelters are expected to close down nearly 2 million tons of operating capacity in the ensuing months in order to handle the losses occurring due to falling prices and declining support from government: industry sources said.
The capacity cuts will control the oversupply in the Chinese aluminium market by reducing the growing stock of aluminium which has crippled the global alminium prices.
Beijing has been putting up efforts to tackle the oversupply issue in aluminium and other metal segments. But, the new government of President Xi Jinping has taken up the matter on a priority basis and insisted that smelters curb capacity growth to bring back balance in the market.
"I would not be surprised if one to two million tonnes of capacity will close in the first half," said an unidentified smelter executive from a well-known smelter.
The trading price for Spot aluminium AL-A00-CCNMM was below 13,000 yuan ($2,100) per ton last week, the lowest price since mid-2009. The price has come down more than 8 percent since the beginning of 2014 and 30 percent from a record high in July 2011.
The price was less than the full production costs of the majority of Chinese smelters, however, it was more than the cash production costs for about 5 million tons of the total 28 million tons of operating capacity, according to industry sources.
About 400,000-500,000 tons of capacity had already been shut so far this year and the idle capacity may expand to 2 million tons by H2 2014, said Xu Hongping, Xinhu Futures' analyst for the aluminium industry.
More than 2 million tons of capacity that was scheduled to come into the market in 2014 would be pushed to next year. However, there are chances of another 2 million tons of low-cost new capacity starting production this year, she added.
Beijing still has not been able to curb the overcapacity successfully over the years because of the government subsidies which are offered to keep the smelter running and to secure revenues and jobs. Government even offered to buy metal from smelters in 2008-2009 and 2013, when domestic demand fell considerably. However, the current leadership has put strict restrictions on subsidies from local governments.
"Production cuts are certain. We may even see some smelters going to bankruptcy if Beijing will do what it says," said the executive at a smelter. Moreover, he added that Beijing will, at the same time, make effort to stop bankruptcy to avoid a financial crisis.
According to an industry source with knowledge of Chinese policy, Beijing would like to close high-cost smelters which are making losses and struggling with credit.
A smelter in Jiangsu province with 100,000 ton annual capacity would close its remaining 50,000 tons capacity this month after a debt crisis, industry sources said. Creditors took control of an 180,000 ton capacity smelter in Guizhou in January, the sources added.
A source at a major aluminium smelter in Henan province said that the local government had sold a major stake in the smelter last year to a group of Chinese firms.
($1 = 6.1430 Chinese Yuan)
