SINGAPORE, May 21 -- Aluminum producers in China are operating at less than the cost of production after domestic prices fell and the government raised power rates for smelters, said Liu Xu, an analyst at China International Futures Co.
All "producers in China are definitely weighing output cuts now," Liu said today. "It's based on how far prices have fallen, without even taking into account that the cost for some producers will increase after the new power rules."
China, the world's largest maker of the metal, said last week it will raise power surcharges for some aluminum companies by as much as 100 percent from June, to curb overcapacity. Aluminum in Shanghai has fallen 13 percent this year and London Metal Exchange prices have dropped 11 percent on concern that Europe's debt crisis may derail the global economic recovery.
Producers in China are probably unprofitable, with an average production cost of 15,300 yuan a ton, said Wan Ling, a Beijing-based analyst at CRU International Ltd. That compares with today's price on the Shanghai Futures Exchange of 15,105 yuan ($2,212), taking this month's fall to 6.8 percent.
"At these prices all aluminum producers in China are losing money," said Jia Zheng, a trader at Soochow Futures Co. "So far we haven't heard of any output cuts yet. Producers will try to maintain output for a long as they can because it is costly and time-consuming to restart idled capacity."
The metal used in cars and airplanes gained 0.4 percent in London to $2,000 a metric ton at 2:26 p.m. in Singapore.
China's measures to raise power charges may affect 6 percent, or 1 million tons of smelting capacity in China, according to estimates by Aluminum Corp. of China, or Chalco, the country's largest producer.
China is cutting overcapacity as stockpiles of the metal in warehouses monitored by the Shanghai Futures Exchange have jumped 61 percent this year after smelters ramped up output on expectations demand will improve as the global economy recovers.
Higher production costs and weak aluminum prices may force smaller smelters to cut production in the second half, Eric Zhang, an analyst at Shanghai Metals Market, a unit of CBI China Co., said in a report last week.
"Zinc and lead producers will be next," said Jiang Donglin, research department manager at Shenzhen Zhongjin Lingnan Nonfemet Co., the country's third-largest zinc maker.
"The bigger ones that have their own mines are still in the black," Jiang said. "Some of the smaller ones, which have to import concentrate, have already started to operate at a loss and it's only a matter of time before they cut output."