* To shut 1-2 million tonnes of capacity in coming months
* Beijing wants to see high-cost smelters forced out
* Bankruptcies likely but not on the wide scale
By Polly Yam
HONG KONG, March 5 China's aluminium smelters are likely to shut about 2 million tonnes of operating capacity in the coming months as they try to limit losses amid falling prices and dwindling government support, industry sources said.
The capacity cuts will trim China's supply growth, slowing the build up of metal that has weighed on global prices.
Beijing has for years tried to tackle the problem of overcapacity in aluminium and other industries, but the new government of President Xi Jinping has made it a priority. That and low metal prices are goading smelters to act to curb capacity growth.
"I would not be surprised if one to two million tonnes of capacity will close in the first half," said an executive at a large smelter, who did not want to be identified because he was not authorised to talk to media on the topic.
Spot aluminium AL-A00-CCNMM traded below 13,000 yuan ($2,100) per tonne this week, the lowest since mid-2009. The price has fallen more than 8 percent since the start of 2014 and has lost 30 percent from a record high in July 2011.
The price was below full production costs of almost all smelters in China but still above cash production costs for about 5 million tonnes of the 28 million tonnes of operating capacity, industry sources estimated.
Some 400,000-500,000 tonnes of capacity had already closed so far this year and the idle capacity could expand to 2 million tonnes by the second half of the year, said Xu Hongping, Xinhu Futures' analyst, who specializes in the aluminium industry.
More than two million tonnes of new capacity that was scheduled to come onstream in 2014 would be delayed probably to next year, though another two million tonnes of low-cost, new capacity should still start production this year, she said.
"Smelters would have a better chance to survive if they cut production. If they don't, they face bankruptcy," said a senior executive at a smelter based in Guizhou province.
LARGE-SCALE BANKRUPTCIES UNLIKELY
Beijing has not had much luck in curbing overcapacity over the years as local governments often have offered subsidies to keep them running to provide revenues and safeguard jobs. Even Beijing helped by buying metal from smelters in 2008-2009 and in 2013, when domestic demand fell.
But China's new leadership has made tackling industrial overcapacity a priority and has prohibited local governments from providing subsidies.
"Production cuts are certain. We may even see some smelters going to bankruptcy if Beijing will do what it says," said the executive at the large smelter.
But Beijing was unlikely to allow many smelters to go bankrupt because that could expose banks to large bad debts and risk a financial turmoil, he added.
Beijing, though, would like to see low prices to force out high-cost smelters, said an industry source with knowledge of China's policy objectives.
Some firms are already exiting the aluminium industry and others are struggling with creditors.
A 100,000 tonne-a-year smelter in Jiangsu province would close its remaining 50,000 tonnes of operating capacity this month after the parent decided to leave the aluminium industry and take over its debt for about 1 billion yuan, industry sources said.
And creditors took control in January of a 180,000 tonne-a-year smelter in Guizhou, the sources said. The smelter's debt totalled about 2.8 billion yuan, one source said.
A source at a large aluminium smelter in Henan, China's top aluminium producing province, said the local government had sold a majority stake in the smelter to a group of Chinese firms in the second half of last year. ($1 = 6.1430 Chinese Yuan) (Editing by Muralikumar Anantharaman)