SHANGHAI, Nov 18, 2011 (Dow Jones) -- Aluminum smelters in central China could cut production if domestic prices fall further as higher production costs squeeze profit margins at a time of slowing global demand for the light metal.
Large-scale supply curbs in the world's largest aluminum producer could, however, lend support to global prices which have dropped amid persistent worries over the debt contagion in the euro-zone.
Three-month aluminum is trading around $2,097/ton on the London Metal Exchange Friday, down 5.5% from a month ago, while benchmark January aluminum on the Shanghai Futures Exchange was around CNY16,020/ton, down 3.3% from last month.
"At the current [domestic] price level, about 30% of aluminum smelters in China are producing slightly underwater," Galaxy Securities Futures analyst Sun Lei said, adding that the average production cost nationwide is between CNY16,000 and CNY16,500/ton.
"When you're at $2,100/ton [LME] and getting close to CNY16,000 [SHFE], it's really cutting into the smelters' profits," a Singapore-based trader said.
Some smelters in Henan and Hubei provinces are planning to idle capacity if prices fall further, industry participants said.
A Beijing-based analyst estimated output in the two provinces totals 5.5 million tons, of which he said between 1 million to and 1.5 million tons could be suspended.
"There are plans for capacity idling, but so far no producers are doing it," said a Shanghai-based trader at a foreign brokerage.
"If prices remain weak for a prolonged period of time, it is not impossible to see a similar situation that we had in 2008, although the size of the suspension won't be that significant," said a senior analyst at China Minmetals Non-ferrous Metals Co.
Even if some plants are idled, China's overall aluminum production may still post on-year gains this year as new capacity in the country's northwest offsets suspensions in Henan and Hubei.
"Output should remain stable around 1.5 million tons per month by the end of this year as long as there's no power or water shortage," said a Beijing-based trader with a foreign brokerage.
October output fell 7.2% from a month ago to 1.41 million tons as smelters in the southwest provinces of Yunnan, Guizhou and Guangxi reduced their output due to limited power supply, although supply was up 0.3% from a year ago. January-October production rose 9.5% to 14.68 million tons, data from China's statistics bureau showed early this month.
Stocks in Shanghai, Nanhai, Wuxi, and Hangzhou totaled 415,000 tons Thursday, an increase of 18,000 tons from a week earlier and a rise of 24% from a month ago. Current domestic demand is estimated around 350,000 tons a week.