Aluminum rush' cools on overcapacity concerns

Whilst optimism about China's demand for nonferrous metals recently pushed international aluminum prices up to new highs, the government has taken prudent steps to curb enthusiasm by throwing cold water on all projects in the pipeline.

China Securities Journal reported on Monday that eight government agencies led by the National Development and Reform Commission, the country's top economic planner, would halt approval of new electrolytic aluminum projects across the country, citing Su Bo, a vice minister of the Ministry of Industry and Information Technology.

"The electrolytic aluminum industry is running at 60 percent of its capacity. There is overcapacity in the industry," the newspaper reported, citing a report to the State Council earlier this year.

This would affect all proposed projects, involving some 70 billion yuan ($10.7 billion), the report said, which are mainly planned in western regions, such as Gansu Province and Xinjiang Uyghur Autonomous Region, where electricity is more affordable. Wang Lijian, a spokesman at the ministry, was not available for comment.

About two years ago, aluminum prices in China were as high as 20,000 yuan ($3,059) a ton, having spurred a round of investment fever in the energy-hungry industry, but margins have since been squeezed, Yang Xuefeng, an analyst at Wanda Futures Co said on Monday.

The Zhengzhou, Henan-based analyst said that smelter worker salaries have decreased to 2,000 yuan a month from over 3,000 yuan in the past. In addition, plants in his province, which is the largest aluminum producer in China, are running at 50 to 60 percent of capacity.

Middle East unrest, a weak dollar and reports that China demand is on the rise, have sparked a spike in nonferrous metal prices on global markets. Major aluminum contracts on the London Metal Exchange reached $2,720 a ton on Monday, their highest since August 2008, while copper on that same exchange is soon expected to rise over $10,000 per ton, Reuters reported on Monday. However, some experts beg to differ. Stuart Burns, a commentator at a global metals market intelligence website, MetalMiner, wrote in a post, saying that March manufacturing data in China "could indicate more finished goods are being manufactured, but less is being sold."

"This is consistent with the current inventory build we are seeing in copper and some other metals in China, too," Burns added.

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