UPDATE:China Aluminum Cuts Offset By New Expansions-Qatalum

BAHRAIN, Sept. 25 -- Chinese aluminum production is likely to stay more or less balanced as cuts in some areas are offset by output growth in others, the chief executive of Qatalum said Tuesday.

Jan Arve Haugan told Dow Jones Newswires that the Asian giant, the world's biggest producer and consumer of aluminum, was growing more aware of environmental concerns.

"China's switch is to close high cost production in the southeast of the country and transform it to the northwest, where hydropower capacity is located," he said. "This ultimately means the market stays balanced."

China has closed inefficient smelters in recent weeks, in part due to the reliance of the sector on expensive coal-fired power for its energy needs.

"We have been, are and will be continually surprised by China," Haugan said. "The closures of capacity there is being driven by a growing awareness of the environmental challenges facing the sector, and this is contributing to policy making decisions."

Smelters in the Middle East, where power is abundant and much cheaper, are in contrast involved in what Haugan described as a "world championship" of smelting production.

"There's almost a competition to be the biggest and cheapest, and as our costs fall, our position on the cost curve also falls and the curve changes shape," he said. "We'll lower the cost curve, then so will other smelters like Emirates Aluminium and Dubai Aluminium, as we all compete in the region."

But smelters in Europe are faring far worse due to the high cost of energy.

"The European policymakers are holding the aluminum industry there in its hands...There's a shift away from Europe to the Gulf region," Haugan said.

He said he was surprised at the "competitive pricing" achieved by smelters in the U.S., where some long-term power contracts have been renegotiated on terms very favorable to producers operating there.

Haugan also said so-called financing deals in aluminum provide "an inherent safety net" to the market price.

Financial deals are where producers sell or pledge material to raise working capital from traders, banks and investors, who buy inventory at spot prices and sell futures one to two years forward.

"Aluminum is still one of the few metals that has a price supported by cost," Haugan said. "If prices rise, these financing deals will roll...The metal won't be released into the market in one go."

The amount of metal held in financing deals soared during the global economic downturn and has been rolled continually since. Metal flowed into warehouses as aluminum demand collapsed, pushing LME stocks to record highs above 4.6 million tons. Stocks are still near historical highs.

There is now concern that when these deals eventually unravel, material will flood the market and cause prices to plummet. The timeframe for the deals, and how much longer they last, remains unclear.

"The intermediate pricing situation for aluminum will be pretty bumpy, and it's hard to have confidence in the price as fund players (and others involved in financing deals) swap in and out of it," he said.