* Banks limit letters of credit to aluminium smelters
* Smelters keep low alumina stocks to cut financing cost
* Shanghai aluminium futures dip to record lows on March 20
By Polly Yam
HONG KONG, March 21 China's aluminium producers
are postponing taking shipments and cutting spot imports of raw
material alumina, sources said, as an oversupplied market faces
additional pressure from tighter credit and falling metal
Reduced shipments to the world's top alumina buyer will
eventually help align inventory levels with output and stabilize
prices but could crimp margins in the interim at global alumina
producers such as BHP Billiton and Alcoa Inc.
Many banks in China have slashed lending to bloated
industries from steel to aluminium by as much as 20 percent,
hardening Beijing's bid to tackle surplus capacity that it has
fought with little success in the past decade.
But unlike copper and, to some extent, iron ore, where the
use of the commodities in financing deals has fuelled fears of
their unravelling and hit prices, aluminium's ordeal is more
linked to excess supply and the limited cash flow among
China's aluminium market is in a surplus now with stocks on
the Shanghai Futures Exchange AL-STX-SGH at 351,047 tonnes on
Friday, the highest since August 2013. Shanghai aluminium
futures prices fell on March 20 to their lowest on
record since contracts began trading in 2005 and have lost more
than 8 percent this year.
The tough market conditions have led the Chinese smelters to
cut purchases of alumina since mid-February. China's alumina
imports fell to 464,820 tonnes in February from 641,987 tonnes
in January, latest customs data showed on Friday.
The drop in Chinese imports has pulled down spot market
prices for Australian alumina ALA-CNIMP nearly 7 percent from
But the smelters are now being forced to take drastic steps.
"Some smelters that contracted to buy imported alumina
earlier are now unable to take the shipments, while others have
already delayed the shipments," said an executive at an
aluminium smelter in Guizhou, who declined to be named because
of the sensitivity of the matter.
The volumes of the postponed shipments could not be
ascertained. Defaults on the contracted shipments were unlikely
as both parties would be keen to avoid legal tangles and such
situations in the past were successfully resolved through
negotiations, the sources said.
Some of the other steps smelters are taking now include
keeping alumina stocks as low as possible to cut financing costs
and in expectation of paying less to buy them in the future.
A trader at a large Chinese trading house said the firm had
resold some alumina imports on expectations of prices falling.
SHAPE UP, OR NO LOANS
Bank credit is getting harder to come by for the smelters.
An executive at a large smelter said Chinese smelters are
finding it harder by the day to get letters of credit from
banks. "The whole industry is having a problem of cash," said
the executive, declining to be named because he was not
authorised to talk to media.
A loans officer at China Minsheng Banking Corp
, the country's biggest non-state lender by assets,
said the bank has started to reduce loans, including limits on
letters of credit, for heavily geared aluminium companies.
"We're looking at their business, their revenues and their
debt a lot closer. For those companies that don't look like
they're in a great shape, we've started to cut our loans. That's
a very clear message from the top since the start of the year,"
said the Minsheng officer.
A loans officer at state-backed Bank of China
said the bank had already stopped all financing
deals for base metals since last year.
China's smelters have also cut production, trimming demand
for alumina. About half a million tonnes of aluminium capacity
had already closed so far this year and the third-largest maker
China Hongqiao warned this week some face closure.
A more recent headache for the smelters is the weakening
yuan, which raises the costs of alumina imports. China's yuan
was just below a 13-month low against the dollar on Thursday.
"The biggest problems are reduced credit given to smelters
in China and yuan depreciation," said a trader at an
international trading house referring to Asia's slowing alumina
"Nobody wants to buy."
(Additional reporting by Fayen Wong in SHANGHAI and Manolo
Serapio Jr. in SINGAPORE; Editing by Muralikumar Anantharaman)