Blooming Privateer Chinese Aluminum Smelters Oversupply Market

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Researched by Industrialinfo.com (Industrial Information Resources Incorporated; Houston, Texas). Chinese primary aluminum production output totaled 4.2 million tons in 2002 compared to 3.371 million tons in 2001. The country's aluminum revolution, fueled by cheap electricity, and having taken advantage of a policy vacuum, will keep the global market oversupplied over the next few years, and is a major concern for the industry. This view was expressed by analysts at the recent International Power and Aluminum conference at Sun City, South Africa.

A spokesman for Alcor (Netherlands) said that from a long-term perspective, China appears to have embarked upon a phase in its evolution that Japan endured in the 1950's and 60's and that Taiwan and South Korea experienced in the 1980's. Because China is a much larger country, its impact on global consumption growth will be increasingly more important.

The vice president of the parastatal Aluminum Company of China (Chalco/Chinalco) (HKSE:2600) (Beijing, China) reported that the number of smelters in the country jumped from 123 from to 132 in 2001, more than double the count of 63 from ten years ago. Further growth in the number of smelters is to be expected. The current number of smelters had a total annual production capacity of 5.1 million tons.

As a listed company Chalco is very unhappy about demands by the stock exchanges to follow regulations and procedures on financing and investment, while other small smelters are mushrooming "everywhere" without the same restrictions being placed on them. The trend in China is for investors to either co-finance smelters and power plants, or build their own. Production is estimated to be higher than the given count as many small investors have managed smelters without recording their investments.

Chalco's concerns can best be understood in terms of its own size and plans for new smelters, including a major venture proposed in India. The company has an asset base of $4.3 billion, and is the third largest alumina producer in the world following the US-based Alcoa and Canada's Alcan Aluminum. The integrated aluminum giant was formed by the Chinese state in 2001 by merging six of the country's largest aluminum producing companies.

Other analysts at the conference said that investment opportunities in aluminum still exist around the globe. Investors are prepared to finance projects where relatively cheap and reliable electricity supply is guaranteed. These conditions may be met at sites such as BHP Billiton's Hillside project in South Africa, Mozal in Mozambique, and the proposed Pechiney smelter at Coega in South Africa.