UPDATE 2-Chalco shuts further 1 mln T of alumina capacity

(Adds comment and background)

By Polly Yam

HONG KONG, Oct 15 (Reuters) - Chalco (2600.HK), the world's third largest alumina producer, is shutting a further 1 million tonnes of production at its Shandong plant, a company source said on Wednesday, which could trim China's output by around 5 percent.

On top of 300,000 tonnes stopped earlier, the closure is equal to about 10 percent of capacity at Chalco, or Aluminum Corp of China Ltd (601600.SS)(ACH.N), but may not be big enough to push up prices as demand for the product slumps.

Aluminium use in industries such as construction, packaging and car-making has slowed down with the global economy in recent months, dragging down prices for alumina, the main raw material.

"This may not cause alumina prices to rise significantly given the weak demand," Geoffrey Cheng, a Hong Kong-based analyst at Daiwa Securities, said. "The alumina industry in China should consider cutting output to below last year's output."

The closure would leave the Shandong plant running at about 200,000 tonnes out of 1.5 million tonnes of capacity.

"Shandong's output plan for the fourth quarter is set at just 45,000 tonnes," the company source said.

Chalco's board secretary Liu Qing said the firm was watching the aluminium and alumina markets and might fine-tune production, without giving details.

Zhang Qing, the firm's investor relations manager, said last Friday Chalco was considering shutting high-cost aluminium capacity because of weak metal prices, a move that will cut its own demand for alumina.

Chalco's shares were 5.2 percent lower in Hong Kong versus a 5 percent fall for the broader index .HSI, and 3 percent lower in Shanghai at the close.

CHINESE DEMAAND FALTERS

Rio Tinto (RIO.AX)(RIO.L), a major supplier of iron ores, alumina, copper concentrate and coal to China, on Wednesday warned of slowing Chinese demand for commodities such as aluminium because of the financial crisis. [nSYD356476]

The warning is the first by a major raw materials supplier that the Chinese commodities boom is losing its punch.

Domestic alumina spot prices have fallen nearly 40 percent so far this year to about 2,650 yuan a tonne on increased supply, including 880,000 tonnes at Chalco's Pingguo plant and 1.6 million tonnes at Huayin Aluminum, 33 percent owned by Chalco.

Analysts expect China to produce more than 24 million tonnes of alumina this year, up from 19.5 million tonnes last year, outstripping demand growth from primary aluminium smelters.

But other high-cost alumina producers have also temporarily closed capacity, in the light of low prices, which could make the country's production fall short of forecasts. [ID:nHKG54845]

Weiqiao Aluminium in Shandong province, the second-largest alumina producer in China after Chalco, has closed half of its 4-million-tonne-a-year alumina capacity, a company source said on Monday. The firm's production costs for alumina were about 3,300 yuan per tonne.

Lubei Group was also closing its 1-million-tonne-a-year alumina refinery, a senior executive said on Monday.

The smelters are being hit by falling price of aluminium MAL3, which has slumped by nearly a third from a record high in July.

Aluminium stocks in the London Metal Exchange's warehouses have been rising, jumping 4 percent on Wednesday to stand at 1.46 million tonnes, more than one month's production in China, the world's top maker of the metal. (Editing by Michael Urquhart)