* 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
"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
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)