June 8 (Bloomberg) -- Aluminum prices in China have dropped below the cost of production, according to the nation’s biggest maker, putting pressure on smelters to reduce output.
Electricity rate increases will have a “significant” impact on smelters, Luo Jianchuan, president of Aluminum Corp. of China Ltd., said today at an Antaike conference.
China, the world’s largest maker of the metal, said last month it will increase power charges to curb overcapacity. Aluminum prices in Shanghai have slumped 18 percent this year and London Metal Exchange rates dropped 16 percent on concern Europe’s fiscal crisis will slow the global recovery and China’s curbs on lending and property speculation will cool demand.
“Many producers are now operating below cost,” said Fang Junfeng, an analyst at China International Futures (Shanghai) Co. “Even if they start cutting output, it will be a while before reduced supply translates into higher prices. We could see prices fall to 12,000 yuan before any meaningful rebound.”
Producers in China are probably unprofitable as the current price is below the average 15,300 yuan output cost, said Wan Ling, a Beijing-based analyst at CRU International Ltd. Today’s Shanghai Futures Exchange price is about 14,240 yuan a ton.
China is cutting overcapacity as stockpiles of the metal in warehouses monitored by the Shanghai exchange jumped 67 percent this year after smelters raised output on expectations demand will improve as the global economy recovers.
The government has ended discounts on electricity charges and doubled surcharges for high-consumption companies. The provincial government of Henan, the biggest producer, banned new aluminum projects for the next three years.
CRU expects 1.3 million tons of capacity in the country to be affected by the surcharge. Energy represents as much as half the cost of producing aluminum.
The effect of higher energy prices on Aluminum Corp., known as Chalco, will be limited, because only a few of its smelters enjoyed the cheaper rates, Luo said, without giving details.
The cost of producing aluminum will increase as power charges go up and this is bullish for prices, Li Yang, an analyst at state-owned researcher Beijing Antaike Information Development Co., said in a May 14 interview.
Aluminum smelters may join their counterparts in the zinc industry by reducing output to stem a drop in prices. Zinc smelters in China have idled as much as 8.8 percent of capacity as rates fall and demand fades, Shanghai Metals Market said.
“Aluminum prices are meeting strong resistance on the way down because it has become unprofitable to make the metal,” said Zhang Hao, an analyst at CITIC Newedge Futures Co. “They have further room to fall, however we might find a floor soon, especially if output cuts come into play.”