Aluminum Producers to Continue Suffering from Overcapacity

SHANGHAI, Oct. 18 (SMM0 – According to the National Energy Administration, electricity use in China was up 2.9% YoY in September, a new 40-month low. The growth of electricity consumption by nonferrous metal industry dropped to 5.5% in September from 6.1% in August. However, power generation rose steadily at some self-owned power plants in Inner Mongolia, which exclusively supply power to aluminum smelters.

Power generation at self-owned power plant under the Inner Mongolia HMHJ Aluminum Electricity hit 6 billion kilowatt hours last year against a projected 7 billion kilowatt hours for 2012. Power generation at the power plant has exceeded 6 billion kilowatt hours so far this year and will keep rising.

SMM understands HMHJ is not alone in reporting rising power generation since aluminum projects have been constantly put into operation in west China.

SMM indicates that Shandong Xinfa Aluminum & Electricity Group, East Hope Group, China Power Investment Corporation and Aluminum Corporation of China are building aluminum projects in west China.

Wang Huajun, Deputy Secretary General of the China Nonferrous Metals Industry Association told SMM that aluminum capacity utilization in China was less than 70% last year, indicating serious overcapacity. Capacity is still expanding after being partially transferred to west China, aggravating risks in the aluminum industry.

Aluminum industry has slid into the red, while downstream consumption has shown no signs of turning around. SMM’s survey indicates operating rates were 60% at aluminum extrusion, plate, sheet, strip and alloy producers.

Aluminum prices fell back following earlier gains. The US Federal Reserve introduced QE3 in September and the ECB launched OMT program (Outright Monetary Transactions), boosting risk appetite and helping LME aluminum rise for eleven trading days in a row. However, with the global economic recovery faltering, huge aluminum inventories are continuing to weigh down aluminum prices.

The slowing global economic recovery and soft demand in China have weakened aluminum prices. There is little chance aluminum smelters will reverse losses anytime soon, given overcapacity in west China.