Two Top Chinese Aluminum Producers Have Different Crystal Balls

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Employees package aluminum ingots at the China Hongqiao Group aluminum smelting facility in Zouping, China.

Photographer: Brent Lewin/Bloomberg

Two of China biggest aluminum producers don’t agree on the market outlook. Struggling state-owned Aluminum Corp. of China Ltd. says the situation is “not optimistic,” while China Hongqiao Group Ltd. sees an upbeat future.

Oversupply pressure in China’s market “may mount again” in the second half as new and idled capacity is brought online, Aluminum Corp., or Chalco, said on Thursday evening after posting first-half net income of 57.4 million yuan ($8.6 million). Closely held China Hongqiao, the country’s biggest producer, earlier this month flagged strong consumption in the same six months after reporting profit of 3.3 billion yuan.

The split highlights a divergence in China’s aluminum sector, where a new generation of low-cost smelters are thriving as companies lumbered with older plants and higher costs struggle to survive, according to Yi Zhu, an analyst at Bloomberg Intelligence in Hong Kong. “Hongqiao is kind of optimistic because they are the largest producer, their costs are low, and so they probably don’t care so much if prices go down.”

“Chalco sounds kind of gloomy,” Zhu said by phone. “They are a much higher-cost producer and if aluminum prices continue to be pressured then more cost-cutting will be needed.”

Aluminum gained 9.6 percent in London this year, helped by tighter supply in China after producers shut higher-cost smelters as the market collapsed last year. Chalco isn’t alone in forecasting that output will increase this half as new and idled smelters come to the market to benefit from higher prices. All signals point to a resurgence in Chinese output, Macquarie Group Ltd. said in a note on August 11.

Hongqiao, the world’s top producer since passing United Co. Rusal last year, boosted first-half net income by 21 percent after expanding output amid a price rally. Hongqiao has much lower operating costs than Chalco because it has more of its own power plants and overseas mines, Zhu said.

China’s output of primary aluminum fell 1.5 percent in the first seven months of the year to 17.98 million metric tons, according to the National Bureau of Statistics. The world market will see a deficit of about 1 million tons in 2016 as a result of demand growing faster than supply, and as Chinese exports of semi-finished products decline, Rusal said Thursday.