U.S. aluminium giant Alcoa Inc is in talks to buy its first smelter in China, marking a rare foreign incursion into the world's biggest aluminium sector as hopes fade for its joint venture with national champion Chalco.

    The move suggests Alcoa is determined to build a market position in China's aluminium smelting sector, with or without Aluminum Corp of China Ltd (Chalco).

    Talks to buy into and expand the smelter in Panzhihua, in southwestern Sichuan province, moved forward when senior Alcoa executives visited last week. Alcoa had first approached the parent of Ming Zhu Aluminium to buy the smelter in 2003.

    "The talks have entered into detail," an executive at the Ming Zhu smelter in Panzhihua told Reuters, without elaborating on the price or timing of a final deal.

    Alcoa would invest in a hydro-power plant and expand the capacity of the smelter to 200,000-300,000 tonnes, in an investment that would cost well over 1 billion yuan.

    "We want Alcoa to come in," the executive said.

    Alcoa had been stymied in efforts to invest in an alumina and aluminium joint venture with Chalco, China's national champion, and last year sold off its 7 percent stake in that company.

    However, the two did partner in buying a share of Rio Tinto , the world's largest aluminium producer after it took over Alcan, to try and block a takeover by BHP Billiton.

    "The market should not be surprised by Alcoa's move. When Alcoa sold Chalco's shares last year, the move indicated the end of the joint venture," Geoffrey Cheng, analyst at Daiwa Securities said.

    "The stake sale gave an option to Alcoa to look for alternative ways to build market position in China."An Alcoa spokesperson in Beijing was not available for comment.

    The target smelter is designed to have 100,000 tonnes of annual aluminium smelting capacity, but so far has installed production pots only for 10,000 tonnes due to lack of funds from its parent, a Guangzhou-based air conditioner manufacturer, investment officials for the Panzhihua government said.

    "The total investment for the smelter was planned for 1.1 billion yuan. But the company so far has injected only about 200 million yuan," a director at the Panzhihua government's investment office said.

    The smelter enjoys preferential fees for hydropower, but will lose that benefit if it does not reach its designed capacity of 100,000 tonnes, he said. China is restricting preferential power fees to encourage economies of scale and force smaller, inefficient plants to shut.

    Alcoa had offered about 100 million yuan to buy the smelter last year but had been rejected, said another investment official of the Panzhihua government.

    ALCOA'S POSITION IN CHINAAlcoa has invested heavily in downstream plants in China, building five aluminium fabricating plants for the production of sheets, plate, foil, auto components, aerospace and commercial fastening systems, according to its website (www.alcoa.com).

    Controlling aluminium smelting capacity in China could secure supply of the metal to the plants and reduce costs.

    But its agreement to buy half of Chalco's Pingguo project, which at the time had capacity of 130,000 tonnes of aluminium and 800,000 tonnes of alumina, repeatedly stalled over disagreements over power pricing and other matters. Pingguo's capacity has since more than doubled.

    Chalco, the world's third-largest alumina producer, was not keen to sell a stake in a bauxite mine that it considered its best resource, at a time when Chinese firms were scouring the world for mineral deposits.

    When Alcoa sold its stake in Chalco in September 2007 for a handsome return of $1.8 billion, that left it free to seek other partners in the smelting business.

    It is already behind Alcan which has a joint venture with provincial-owned Qingtongxia Aluminium Group in Ningxia.