Energy & Resources

Stronger mettle

Overcapacity issue proves no obstacle to Chinalco’s capital raising

Stronger mettle

Not in short supply: aluminium

In recent months, China’s State Council has pushed hard to reduce industrial overcapacity, charging 14 different ministries to work together towards eliminating excess production. Week in China has covered some of these efforts before (see WiC 49), which have included attempts to restrict loans, control land use and deny bond and equity financing.

So perhaps it comes as something of a surprise that these latest measures seem to have failed to stop the national aluminium champion, Chalco, from going ahead with a share sale that will be used to boost capacity for aluminium – even though the non-ferrous metals sector is already a prime overcapacity candidate.

On April 16, China’s securities regulator approved Chalco’s plan to raise up to Rmb10 billion ($1.46 billion). According to the terms of the deal, it must receive financing from investors within six months. The funds raised will help pay for the company’s alumina project in Chongqing, as well other projects in Shanxi and Henan.

These are sizeable projects – in total they will increase Chalco’s annual production capacity by 2.3 million tonnes a year. Once they become operational, this year and next year, the company’s total annual capacity will reach 13.5 million tonnes, representing approximately 57% of China’s total aluminum output.

The question worth asking is why would Chalco want to increase its presence in what is already an over-crowded market?

The industry numbers appear to show that any major expansion would just exacerbate a pre-existing problem: in 2008, China’s aluminium production capacity was only 78% utilised, according to a report by the European Chamber of Commerce in China. The same report predicted that for 2009, the utilisation rate could be as low as 67%.

Chalco could be expanding on the basis that demand for aluminium will pick up in line with the global economic recovery. Chalco has already said that aluminium sales in China will grow 20% this year. “We are bullish about China’s aluminium demand,” declared Liu Xiangmin, Chalco vice-president, last month. He said that much of the growth will come from increased usage in the transportation system, especially in the expanding high-speed train network.

Analysts are clear on the effects of adding extra facilities: “Currently, alumina overcapacity still exists, which limits the profitability of additional production,” Xue Feng, of CITIC Securities, told 21 CN Business Herald. And profitability is a major issue for Chalco, which in the first half of 2009, suffered substantial losses.

But perhaps the most pertinent question is how could the government let the share sale go ahead when it appears contrary to its earlier policy announcements? This could be taken as further evidence of the State Council’s difficulties in imposing its will, especially when it requires the coordination (and co-operation) of so many different ministries and agencies.

Chalco is the listed subsidiary of Chinalco. The names of the two have often been used interchangeably in the past, but this is increasingly misleading. That’s because the state-owned (and unlisted) parent has diversified its business away from aluminium and into other metals. Chinalco has, for example, purchased copper mines and is looking to become a major player in China’s rare earths business. It also holds a 9% stake in Rio Tinto.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.