SMM Exclusive: Aluminum Producers Prefer Output Control to Production Cuts

SHANGHAI, July 1 (SMM) -- Rumors concerning production cuts at China's aluminum producers circulated in the market, and some sources even reported that Henan province plans to idle 700 kt/yr aluminum capacity. In this context, SMM conducts a survey of China's aluminum producers. 

According to the survey, aluminum producers in Henan, Shandong, and Hubei provinces experienced output decreases currently, but only one aluminum producer in Henan province cut capacity of 200 kt/yr, with further capacity cut of 90 kt/yr expected in the future. This producer cut aluminum capacity in anticipation of lower aluminum prices in the future. In addition, Henan province began to raise power tariffs since the start of June, and the electricity generated by this producer's power plant fails to support all capacity, so higher cost pressure also contributes to capacity cut. 

According to SMM sources, there are three reasons behind output declines at other aluminum producers.

First, China's National Development and Reform Commission (NDRC) requires eliminating the electrolytic cells with the current of 100KA or below by the end of 2010, and aluminum producers completed this task ahead of schedule. Aluminum producers are suffering losses currently, and they shut down some smaller electrolytic cells which are scheduled to be phased out by the end of 2010. SMM statistics show total capacity of aluminum electrolytic cells with current 100 KA or less is approximately 300 kt/yr in Henan province, and nearly 100 kt/yr capacity remained idled after shutting down in 2008. Similarly, aluminum producers in Shandong and Hubei provinces also phased out inefficient capacity amid higher electricity prices, and SMM predicts more inefficient aluminum capacity will be eliminated gradually in China over the next one or two months if aluminum producers remain unprofitable. According to SMM sources, total inefficient capacity is 1.1 million mt/yr, with 600-800 kt/yr capacity still in operation currently.

2. Current intensity of electrolytic cells is lowered. Some aluminum producers raised the current intensity of electrolytic cells by 5% in order to increase aluminum output, but currently some aluminum plants in central China cut the current intensity to normal or lower levels in an effort to reduce aluminum output when this move does not affect the service life of electrolytic cells, as well normal operations.

3. Some aluminum producers conducted maintenance of electrolytic cells ahead of schedule but delayed the restart of operations in order to reduce aluminum output, which is one major method used by aluminum producers to maintain normal production before production cuts. These producers were cautious about future aluminum prices and had to adopt a wait-and-see attitude in view of higher costs caused by production cuts.

To sum up, any production cuts at China's aluminum producers were limited as of late June, and most producers opted for controlling output through adjusting operation. Meanwhile, as there is little likelihood aluminum prices will fall sharply in the short term, and alumina prices and prices for supplementary materials including fluoride salt also move on a downward track, so large-scale production cuts will unlikely occur in July. However, more aluminum producers will control output through the above-mentioned three ways in China.  
  
To contact the writer on this report: ericzhang@smm.cn

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