The Aluminum Corporation of China Co. Ltd. (Chalco) [NYSE:ACH], China's largest alumina and aluminium producer, has announced it will cut alumina spot prices by 16.7% to RMB 3,500 ($505.09) per tonne from today onwards, which industry insiders believe is mainly due to the current surplus in the domestic alumina market.

"Growth of alumina production this year has been much faster than primary aluminium production growth, which has resulted in a surplus in the alumina market and is further compounded by relatively sluggish consumption of downstream aluminium smelters," an anonymous official with the sales department of Shandong Weiqiao Aluminum and Electricity Co. Ltd., a leading alumina producer, told Interfax today.

According to the official, the company is now in discussions with other non-Chalco alumina producers to adjust alumina ex-works prices, which will likely decrease to RMB 3,500 ($505.09) a tonne in the near future.
Currently, non-Chalco alumina producers are offering spot alumina prices of between RMB 3,550 ($512.30) and RMB 3,580 ($516.63) a tonne, according to the official.

"Such a move by Chalco will definitely pressure other alumina producers to decrease prices to even lower than RMB 3,500 ($505.09) in order to survive the competition, though consumption maintains sluggish at the moment. However, the alumina price cut will temporarily increase profit margins of aluminium smelters," Liu Lei, an analyst with ChinaCCM.com, said.

In addition, the Chinese alumina market faces further oversupply pressures with several major alumina projects coming online this year.

In March, Shandong Chiping Xinfa Co. Ltd. started operation of a 400,000-tonne alumina line in Jingxi county, Guangxi Province. The company aims to expand the Guangxi-based plant's capacity to a final 1.6 million tonnes per annum.

Guangxi Huayin Aluminum Co. Ltd's 1.6 million-tonne alumina project started operation in mid-May and is scheduled to reach full capacity on June 18. Chalco is a major shareholder of Guangxi Huayin.

In addition, Chalco's Guangxi Pingguo alumina plant expansion project will likely see capacity increased by 880,000 tonnes by the end of June.

"The main purpose for Chalco's price decrease this time is to probably create a better market environment for its products from the two new Guangxi-based alumina projects, and also to alleviate pressure as its Henan subsidiary is building large stockpiles," the Weiqiao official said.

Most domestic alumina producers are feeling the heat from soaring raw material prices, including electricity, coal and bauxite. High freight rates have lifted average imported bauxite prices to $75 per tonne in April, up at least 20% when compared with last year.

"Our cost for alumina production is around RMB 3,000 ($432.93) a tonne due to increased raw material prices. We believe this cost level will support alumina prices from falling sharply in future," the official said.

Commentary

Chalco's alumina price slash will deteriorate market volatility, which is facing surplus supply and sluggish consumption challenges. Other alumina producers will definitely follow the suit to decrease alumina prices, but the downside price trend will not help boost up alumina consumption in downstream smelters.

Ample alumina supply and downward price trend make aluminium smelters adopt wait-and-see attitude onto the alumina market. However, any fall in the alumina price will be limited in the future if and when raw material costs surge.