For eight years after it was established, the Aluminium Corporation of China (Chinalco) was a gleaming success story – an ascent crowned by its acquisition of a 9% stake in Rio Tinto in early 2008.
But last year things started to go wrong for newly appointed top man Xiong Weiping, and he’s not out of the woods yet. He now has the daunting challenge of trying to remould the aluminium company in the face of overcapacity in the industry, rising energy costs and soaring company debts.
It takes an enormous amount of energy to make aluminium (about a third of production costs). That becomes much more of a factor when power prices are on the up. Last May, the National Development and Reform Commission (NDRC) introduced a long-expected hike in electricity prices, also ordering provinces to eliminate the price discounts that energy-intensive companies (like Chinalco) had previously enjoyed.
Even before the NDRC stepped in, Chinalco’s listed arm (Chalco, of which it owns 38.5%) was in a bind. Chinese smelters are producing way too much aluminium, creating a glut that’s eating away at profit margins.
And that’s despite soaring demand for the metal, which is used in everything from cars to construction. “In the past five years, China’s aluminium production developed too fast,” explains Xiong, Chinalco’s chairman, “[but] in the next three years, aluminum demand will increase as the economy grows… I expect the 20-30% overcapacity will disappear.”
But demand may not move fast enough to save Chalco from an embarrassing showdown with creditors. It has $6.2 billion of bank and public borrowings coming due over the next 12 months. State-owned banks are likely to lend a rather big hand to the politically powerful metals giant, but they might ask for their pound of financial flesh if Chalco can’t turn a profit for the year.
Chalco had a particularly dismal 2009, losing Rmb1.6 billion ($235 million) as the price of aluminium fell. It did much better in the most recent quarter, incurring a loss of Rmb96.7 million. But if it ends up in negative territory for the second year in a row, it could get designated a ‘special treatment’ stock on the Shanghai Stock Exchange. That would make any future capital raising more expensive and could even see the company forced to delist.
Unless the price of aluminium recovers significantly, it seems likely that Chalco will have yet another year in the red. And it won’t just be public investors looking for someone to be held accountable. The company is ultimately answerable to Sasac (the state-owned assets supervision and administration commission, see WiC45), which took on a new boss last month, Wang Yong. The success or failure of Chalco will be one benchmark by which his tenure is judged.
If Chalco does end up being designated a special treatment stock, it will be a setback not just for Sasac but for the policymakers who have promoted a ‘state-capitalist’ economic model as their preferred means of creating global firms. The former boss at parent firm Chinalco, Xiao Yaqing (something of a golden boy as far as the State Council is concerned) was even promoted to a role coordinating industrial policy.
Chinalco now plans to diversify away from aluminium into other metals, principally copper, iron ore and rare earths. Likewise it will buy coal mines.“We are planning to set up three coal production bases over the next three years to reduce electricity costs,” explains Xiong. He’s also promised to cut Chinalco’s aluminium capacity by 8% before next year.
Xiong has vowed that Chalco will be profitable in the second half and will avoid a full year loss.
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