Chalco Seeks to Invest in Coal, Power Producers to Cut Costs, Xiong Says

Aluminum Corp. of China Ltd., the country’s biggest producer of the metal, is seeking to invest in coal and power producers, and is studying projects in Southeast Asia to access cheaper power and raw materials.

“In neighboring countries such as in Southeast Asia, there are rich bauxite, coal and hydropower resources, and Chalco is actively seeking investment opportunities,” Chairman Xiong Weiping, 53, said in a Bloomberg Television interview today in Hong Kong. “We are willing to form strategic partnerships with power and coal companies by stake purchases to ensure stable and low-cost supplies.”

Xiong plans to diversify into coal, iron ore and rare earths as higher fuel costs and aluminum overcapacity in China, the world’s biggest metals consumer, crimped profit margins. The Beijing-based company known as Chalco posted a loss of more than 500 million yuan ($74 million) in June alone on power costs.

“The control of coal resources is a key to cutting aluminum production costs,” said Helen Lau, an analyst at UOB- Kay Hian Ltd.

Chalco, which posted a second-quarter loss on Aug. 23, fell 1.8 percent to HK$6.15 at the 4 p.m. close in Hong Kong. In Shanghai, it fell 2.6 percent to 10 yuan.

“Chalco will not simply expand aluminum and alumina capacity in the future, and will focus on building our own coal production base and coal-fired or hydropower plants to produce aluminum,” Xiong said. The company buys almost 20 million metric tons of coal a year.

Under Pressure

“With electricity cost accounting for roughly 35 percent of smelting cost, we believe the company would remain under margin pressure, unless there is a strong recovery in demand,” Goldman Sachs Group Inc. said in a report yesterday.

Chalco in February agreed to jointly develop and operate a $1 billion smelter with billionaire Syed Mokhtar Al-Bukhary in Malaysia’s eastern Sarawak state where a $2.4 billion hydroelectric dam is near completion.

“Securing coal and hydropower resources is key to ensuring Chalco’s cost competitiveness and protection against price fluctuations,” Xiong said. It plans to build two to three coal production bases in three years, he told reporters yesterday.

Indonesian coal shipments to China more than tripled to 34.8 million tons in the first seven months of the year, or about a third of the nation’s total purchase. The Southeast Asian country is China’s largest coal supplier, according to Chinese customs data.

Capacity Cuts

Chalco plans to shutter 330,000 tons of outdated aluminum capacity by 2011, Xiong said today. That would be about a third of the 1 million tons of capacity the Chinese government wants closed in the whole country as part of its plan to curb metal pollution and energy usage.

The company plans to build new low-cost facilities at Liancheng Aluminum Plant in Gansu, Xiong said.

China, the biggest consumer of aluminum, is suffering from overcapacity as production has “developed too fast,” depressing prices, Xiong said. The company yesterday said output in China would surpass demand by 500,000 tons.

Demand has also been hurt as the government curbed property speculation, he said. More than a third of aluminum demand comes from the property sector.

“China will step up urbanization and will restructure the real estate market, in particular provide more government- subsidized apartments, which will boost aluminum demand,” Xiong said. “In the next three years, aluminum demand will increase as the economy grows and aluminum replaces other metals. I expect the 20-30 percent overcapacity will disappear.”

--Xiao Yu. With reporting by Melody Fu and Paul Allen in Hong Kong and Winnie Zhu in Shanghai. Editors: Tan Hwee Ann, Indranil Ghosh.

To contact the Bloomberg News staff on this story: Xiao Yu in Hong Kong at yxiao@bloomberg.net;

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