HONG KONG/SHANGHAI, March 1 (Reuters) - Aluminum Corp of China Ltd (Chalco) , the country's top aluminium maker, returned to profit in the fourth quarter of last year, but cautioned that the sector faced headwinds in China from high costs and excess capacity.
To cope with this, Chalco said it would be looking beyond China's borders for growth on expectations that demand for the lightweight metal in the transport, packaging and building sectors were expected to rise on sustained economic recovery in the United States and Europe.
"In China, the challenge for the aluminium sector remains overproduction and rising costs, but in the global picture, demand remains strong and there are a lot of growth opportunities," Chalco Chairman Xiong Weiping told a news conference in Shanghai on Tuesday.
China is the world's largest producer of aluminium and represents about 40 percent of global demand.
But with the country's output of the metal expected by Chalco to reach 19 million tonnes this year, outstripping consumption by 1 million tonnes, competition in the home market will be fierce.
Still, Chalco expects aluminium prices to drift up this year, in part because of broad-based inflation and currency factors.
Xiong said the company expects three-month aluminum futures prices at the London Metal Exchange (LME) at $2,300-2,900 per tonne this year, compared with what it said was an average of $2,272 in 2010.
Aluminium futures prices at the Shanghai Futures Exchange (SHFE) would probably range from 16,000-18,500 yuan($2,435-$2,815) per tonne, compared with an average of 16,186 yuan last year, Xiong said.
"The company has relatively high operating costs and the second problem is domestic competition is rising," said Alexander Latzer, an analyst at Daiwa Securities in Hong Kong.
RISING COSTS HURT
Chalco reported a net profit of 365.2 mln yuan yuan ($55 million) for October-December, according to Reuters' calculations based on its 2010 results.
That was lower than an average forecast of 554.3 million yuan from 14 analysts polled by Thomson Reuters I/B/E/S, even though Shanghai aluminium prices were higher last year and the company's volume was up 12 percent year-on-year.
Chalco's Hong Kong shares fell 2.3 percent by 0320 GMT on Tuesday in a steady market following the lower-than-expected results, which contrasted with those of its rivals.
Higher aluminium demand saw Alcoa Inc , the largest U.S. aluminium producer, report a better-than-expected fourth-quarter profit last month.
Chalco said it would still look out to diversify into production of other metals and raw materials such as coal, iron ore, rare earths and copper.
Xiong said Chalco was planning to set up two aluminium production bases in China's Guizhou province, and was also looking to build a 5 million tonne coal production base in the country.
He said its joint venture with Rio Tinto would seek copper, coking coal and other strategic resources.
Chalco plans to raise up to 9 billion yuan from a private placement of new A-shares to be listed in Shanghai to fund its Xing Xian alumina project and for other purposes.
Analysts were expected to revise down 2011 earnings estimates after the disappointing results, Citi said in a research report.
"Net profit would be even worse if the company does not reclassify its depreciation policy in December 2010," it said.
Chalco announced in December 2010 that it would reclassify its account policy on depreciation from 2H10 and such adjustment will add 400-500 million yuan to the pretax profit in 2010.
"Fourth quarter 2010 pre-tax profit was 536 million yuan, suggesting earnings could be close to zero if no accounting reclassification," Citi said.