July 7, 2014 / 5:20 AM / 3 years ago

Output cuts expected to shrink China aluminium surplus

* Surplus will be smaller than expected 1 mln T due to idled capacity

* Even with some capacity restarting, touted surplus will still be dented

* Strong demand seen from transport sector, exports

* Henan province considering subsidy on power fees -smelting source

By Polly Yam

HONG KONG, July 7 (Reuters) - Rising demand and the closure of some 2 million tonnes of aluminium capacity are likely to shrink an expected surplus of the metal in China this year.

That would help reinvigorate aluminium prices in the world's top consumer and producer of the commodity, underpinning a global benchmark that has already risen around 15 percent since touching its lowest in over four years in February.

"The surplus looks better than what we expected at the beginning of the year," said Shanghai-based analyst Wang Chunhui at information provider SMM.

He now forecasts a surplus of less than 500,000 tonnes - half the 1 million tonnes touted by analysts and smelters earlier in 2014.

Smelters closed about 2 million tonnes of high-cost capacity between late 2013 and May 2014 as prices tanked on worries over the surplus and as the economy slowed.

Although around 200,000-500,000 tonnes has come back online as domestic prices rose from 5-year lows touched in March, market participants said the closures would be enough to severely dent any production surplus - even with more restarts expected later in the year.

An executive at a state-owned aluminium smelter said that demand and supply would be in balance in 2014. He declined to be identified as he was not authorised to speak with media.

China's primary aluminium production grew 7.9 percent from the year before in the first 5 months of 2014 to 9.59 million tonnes, lower than an 8.2-percent rise in the same months last year, official data showed.

SMM's Wang said he expected output for the year to come in below 28 million tonnes, down from the 28.3 million tonnes he predicted earlier.

DECENT DEMAND

Robust demand is also likely to sap any production surplus, with recent data indicating China's economy is stabilising.

The executive at the state-owned smelter said appetite for aluminium had climbed in the second quarter from the first quarter and a year ago due to consumption from the transport sector, as well as growing exports.

A senior executive at a large factory which uses primary aluminium to make semi-finished products in Shandong province said the firm's sales of products used in the transport sector had risen 30-40 percent in the first half from a year ago.

"We see aluminium prices between 13,000 yuan and 14,000 yuan in the second half," he said.

Spot aluminium AL-A00-CCNMM traded at about 13,400 yuan ($2,200) on Monday, up nearly 9 percent from its March lows.

China's output of semi-finished aluminium products such as profiles and plates reached a record 4.09 million tonnes in May.

Exports of those items rose 7 percent year-on-year in the first five months of 2014.

Meanwhile, another 700,000-800,000 tonnes of idled capacity could restart in the second half, with half coming from Guizhou province, said Xu Hongping, a Shenzhen-based analyst at China Merchants Futures.

That would come as the government of Henan, the second-largest aluminium producing province in China, considers giving a subsidy of 0.02 yuan per kilowatt used in production to local aluminium smelters, according to a manager at a large smelter there. He did not want to be identified.

Guizhou has already agreed to give a power subsidy to producers. Electricity charges account for about 40 percent of smelters' costs.

State-backed research form Antaike estimated a Chinese aluminium surplus of 320,000-tonne in 2013. ($1 = 6.1990 Chinese Yuan Renminbi) (Reporting by Polly Yam; Editing by Joseph Radford)

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