China’s Aluminum Overcapacity Seen by Fitch Holding Down Prices

Jan 27, 2014 4:00 am ET

Jan. 27 (Bloomberg) -- Rising capacity at aluminum plants in China, which account for almost half of world output, will weigh down prices this year in a market that’s already over- supplied, according to Fitch Ratings Ltd.

Capacity may increase to 34.2 million metric tons from 30.3 million tons in 2013 and 26 million tons in 2012, Fitch analysts Laura Zhai in Hong Kong and Su Aik Lim in Singapore, wrote in a report today. Most of the additions will be in the western part of the country, according to the report.

Capacity growth in China, also the world’s biggest user, may help extend a slump in futures prices that slid 13 percent last year. China increased production last year, while the rest of the world cut output by 1.06 million tons, according to the Fitch report.

“Capacity growth continues to outpace demand growth,” according to the report. “Significant capacity additions in 2013 and 2014 are likely to keep Chinese aluminum prices structurally low because of intense competition in a severely over-supplied market.”

While the central government has tried to curb capacity since 2003, local governments in the west of the country have continued to approve new smelters as they seek to boost economic growth, according to Fitch. Nearby coal resources also provide low-cost energy, the analysts said.

Aluminum for delivery in three months on the London Metal Exchange fell 0.3 percent to $1,756 a ton at 4:37 p.m. in Hong Kong, down 2.5 percent this month. The price touched $1,736.25 on Dec. 2, the lowest since July 2009. Futures on the Shanghai Futures Exchange dropped 0.7 percent to end at 13,560 yuan a ton, down 3.4 percent this month.

Costs for Chinese aluminum producers will fall as Xinjiang, which alone accounted for about half of new capacity additions in 2013, gains a greater share of the total, Fitch said. The north-western region now makes up almost 10 percent of China’s aluminum production, it said.

The Asian nation’s demand for the metal may grow by about 7 percent to 8 percent annually over the next three to four years, the Fitch analysts said.

--Editors: Sungwoo Park, Alexander Kwiatkowski