Aluminum Consumption in China to Rise 20%, Oversupply Persists, CBI Says

Aluminum consumption in China, the world’s largest user and maker, may expand 20 percent this year as the economy extends a recovery, according to CBI China Co.

Demand may increase from 14.02 million metric tons in 2009, Eric Zhang, an analyst at the Shanghai-based commodities research and forecasting company, said in a phone interview. The country is expected produce 17.5 million to 18 million tons of primary aluminum this year, resulting in an oversupplied market, he said.

China is taking steps to cut overcapacity in the aluminum industry, ending discounts on electricity charges and doubling surcharges for high-consumption companies. The provincial government of Henan, the biggest producer, banned new aluminum projects for the next three years.

“The recent measures to limit production will take effect gradually, the results of which can only be seen in the medium to long term,” said Zhang. “In the short term, prices will be supported but will have little room to rally as stockpiles are still very high.”

CBI’s forecast echoes that of United Co. Rusal, the world’s largest aluminum producer, which said last week that demand in the world’s fastest-growing major economy may grow 20 percent this year. Prices jumped 45 percent in 2009 on stimulus spending and state stockpiling in China.

Aluminum for three-month delivery on the London Metal Exchange slumped to less than $2,000 a ton yesterday for the first time since February as commodities tumbled on concern that demand for raw materials will slow after European nations slashed budgets to curb deficits. The contract was at $2,007 at 10:47 a.m. in Singapore, down 9.6 percent this year.

Electricity Discounts

Inventories of aluminum in warehouses monitored by the Shanghai Futures Exchange have jumped 61 percent this year as Chinese smelters ramped up production on expectations that demand will improve as the global economy rebounds.

China stopped selling electricity at discounts to high- consumption companies with immediate effect, the National Development and Reform Commission said in a May 13 statement. Electricity surcharges for most aluminum companies will be doubled to 0.10 yuan per kilowatt-hour from June 1, the commission said.

Some companies with obsolete capacity that needs to be closed will have their rates raised 50 percent to 0.30 yuan per kilowatt-hour. This could threaten the closure of up to 2.7 million tons of capacity, Barclays Capital estimated yesterday.

‘Controlling Output’

“This is a way of controlling output by raising production costs and making the operating environment more difficult, but the actual elimination or reduction of capacity will still be determined by market forces,” said Zhang. “Higher power rates won’t reverse the increase in output and capacity as any eliminated capacity will probably be offset by new energy- efficient smelters coming onstream. However, it will slow the rate of increase.”

In Henan, the provincial government said it won’t approve the construction and expansion of primary aluminum projects in the next three years, Xinhua News Agency said May 15.

“The cost of operation in Henan isn’t attractive anymore because coal costs have gone up and the government is clamping down on illegal mines, so total power output has been affected,” said Zhang. “I don’t think this measure will have much impact because Henan isn’t a suitable place to build new projects. The northwest and southwest of the country, where electricity costs are low, may be better.”

To contact the reporter for this story: Glenys Sim in Singapore at gsim4@bloomberg.net

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