May 23, 2012 / 10:01 PM / 5 years ago

China's top aluminium province idles plants as demand slows

* Seen cutting another 500,000 tonnes by year-end

* Spreading to whole of China if prices fall

* Some new capacity may be delayed to next year

By Polly Yam

HONG KONG, May 24 (Reuters) - China's top aluminium-producing province has idled about 700,000 tonnes of capacity in recent months, a senior industry official said, further evidence that slower growth in the world's No. 2 economy is denting the country's appetite for commodities.

The total reduction could rise to 1.2 million tonnes by the end of the year, Henan Nonferrous Metals Industry Association deputy chairman Liu Libin said, more than a quarter of the province's total capacity.

Slowing growth, along with a recent slump in prices, has sparked a string of deferrals and defaults on coal and iron ore deliveries to China and seen stocks of the minerals pile up in the country's ports.

Aluminium prices have joined a general slump for commodities, with London Metal Exchange metal down 15 percent from the year high hit in early March.

"Smelters that are still producing in Henan are big ones," Liu told Reuters.

"They are still able to maintain normal cash flows and are hoping the market will improve soon," he said, adding that local governments will support smelters as they want to maintain tax contributions and employment.

China is the world's largest producer of aluminium - used in the building, transport and packaging sectors - with a production capacity of more than 23 million tonnes a year.

Most of its smelting capacity sits at the high end of the global production cost curve, but many smelters have so far resisted closure, even though global producers Rio Tinto , Norsk Hydro and UC RUSAL have shaved output since the start of the year.

Norsk Hydro became the latest to announce a closure, saying on Wednesday it would shut its 180,000 tonnes a year Australian smelter.

Henan's move to shut plants illustrates how a combination of challenges, including sputtering demand at home and abroad, a production surplus and sliding prices are forcing smelters to bow to cost pressures.

State-backed research firm Antaike has estimated that less than one million tonnes of aluminium capacity in the country is currently shut, with capacity set to exceed real consumption by more than 2 million tonnes by the end of the year.

The supply glut has seen Shanghai exchange stocks of the metal AL-STX-SGH reach a near one-year high of 369,247 tonnes in April, before falling to 335,301 tonnes last week.

OTHER PROVINCES MAY JOIN

Henan, located in eastern central China, has 4.6 million tonnes of annual aluminium production capacity. Smelters there are among the most costly to run in China due to high electricity tariffs in the land-locked province.

Liu said some 700,000 to 800,000 tonnes of capacity in Henan was most vulnerable to production cuts as these smelters do not have their own power plants.

The price of front-month aluminium on the Shanghai Futures Exchange, which typically reflects spot prices in China, has fallen from a peak of over 24,000 yuan ($3,800) a tonne in 2008 to 15,950 yuan on Wednesday.

Smelters in other provinces may also join the production cull if domestic prices fall to 15,000 yuan a tonne for a prolonged period, Liu said.

For now, production cuts in Henan are being compensated by new smelters coming onstream, including some 600,000 tonnes of new capacity in the remote northwestern Xinjiang region.

However, sustained low prices could help balance China's supply, as more smelters idle capacity or delay the start of new production lines.

"The production cuts should peak at the end of the year. Imports may rise after that," said a source at large Henan smelter, which was also thinking of idling some capacity. ($1 = 6.3231 Chinese yuan) (Editing by Michael Urquhart)

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