HONG KONG, June 29 -- A plan to idle 700,000 tonnes of annual aluminium capacity by 13 smelters in Henan province of the world's top manufacturer China could prompt other firms to follow suit if prices stay weak.
"The Henan move would have spillover effect if other Chinese smelters join the cuts," said Lan Ke, an analyst with the asset management division at Southwest Securities in Beijing.
The capacity cuts are likely to be in place by early July as low prices and high costs hit profitability at the units, Liu Libin, vice-chairman of the Henan Nonferrous Metals Industry Association, told Reuters on Monday, adding the smelters had started production cuts in the middle of June
"Smelters are suffering losses of near 2,000 yuan ($294) per tonne," Liu said, referring to sale prices below production costs such as electricity.
Spot aluminium AL-A00-CCNMM in Shanghai traded around 14,630 yuan per tonne on Monday, down more than 15 percent from this year's high of 17,380 yuan seen in early January.
LME aluminium MAL3=LX prices rose $30 a tonne to $2,020 in early London trade, from $1,990 in late Asian trade on Monday. The contract is down near 10 percent this year.
"Over the next six to nine months, we believe that closures of high cost smelters in China and the permanent closures of currently shuttered high-cost European and US operations will underpin the aluminium price at the current $1,900/T level," Nick Moore, head of commodity strategy at RBS Global Banking & Markets wrote in a note last week.
MATTER OF SIZE
Liu said it is unlikely any of the closed Henan smelters would be reopened this year if aluminium prices stay weak.
"Smelters want to see profit margins of more than 1,000 yuan per tonne before they'd think about reopening," Liu said.
Lan at Southwest said the scale of production cuts from other Chinese smelters would depend on Henan's production figures in July as that should show the extent of production cutbacks in the province, accounting for a fifth of China's aluminium production.
"Henan could have given the news out to test the water," Lan said, adding smelters may repair some facilities to lower output. "For now, people should be waiting to see the fact," he said.
China's July production data for commodities such as aluminium is expected to be released in the middle of August.
China has around 20 million tonnes of annual aluminium production capacity of which 4.5 million tonnes is located in Henan.
State-backed research group Antaike and the country's top aluminium producer Chalco (2600.HK: Quote) (601600.SS: Quote) have predicted the country's aluminium production at 17 million tonnes this year, which will be a rise of more than 20 percent from last year.
Henan produced 3.1-3.2 million tonnes of aluminium last year, Liu said.
Based on a forecast by Liu annual production would fall by 350,000 tonnes in the province this year from an earlier estimate of more than 4 million tonnes.
Smelters in Henan had closed some capacity in late 2008 on weak demand and low prices, but gradually gradually restarted most operations from the second quarter of last year.