China chill costs metals industry millions

By Nick Trevethan and Polly Yam - Analysis

SINGAPORE/HONG KONG (Reuters) - As much as a 10th of China's metal smelting capacity has been brought to a standstill by power shortages and bad weather, and production is unlikely to be restored before mid-February, analysts say.

Snow damage to power network in Guizhou has halted production at almost all the province's 700,000-800,000 tonnes of aluminum capacity, a smelter official in Guizhou said, as power companies cut supplies to energy-intensive industries in order to maintain power for households and essential services.

While analysts do not expect a repeat of the winter of 2004, when systemic brownouts due to insufficient generating capacity prompted long-term closures, they are bracing for the lost capacity to last through the coming Chinese New Year.

"In the longer term this won't cause a significant disruption to metal supply. This is temporary and output should be restored within two weeks," economist John Kemp at Sempra Metals said.

But that still translates to 290 million yuan ($40.31 million) a week for Guizhou's aluminum industry alone and other analysts said there could be longer-term implications for an industry that accounts for a third of world production.

Geoffrey Cheng, research director for Daiwa, who expects the country's power supply will remain tight in 2008, said: "After this outage, local governments, or even the central government, may tighten power supply to all smelters, especially aluminum."

Aluminum prices surged 2.4 percent in Shanghai on Tuesday, the biggest daily move since late November, as dealers worried about supply.

"KEY DRIVER"

Sudden power cuts can be disastrous for metal smelters, especially aluminum. If metal is allowed to solidify in the electrolytic cells, or pots, it has to be chipped out and the pot then needs refurbishing, which can take months.

ANZ senior commodities analyst Mark Pervan said: "The Chinese aluminum business has been the key driver behind the market and this big question mark over supply could help lift prices."

"These kinds of capacity restrictions could accelerate China's switch back to a net importer of aluminum, which we haven't really seen for three or four years."

Chinese aluminum exports tumbled 81 percent last year to 161,000 tonnes as a series of export restrictions.

China could assume the status of a net importer of the metal as early as February, Pervan said.

Guizhou is also home to hundreds of small ferro-alloy producers that have shut down due to power shortages, but officials said it was hard to estimate losses within the fragmented sector. Output of ferro-alloy, used in steelmaking, in the province in 2007 was 1.8 million tonnes, mostly manganese alloys.

The scale of the bad weather in China, which has held most of the south of the country in an icy grip for over a week, made estimating the impact on Chinese industry difficult.