China's aluminium producers will face tough times this year as a result of mounting costs and unfavourable government policies, although the sector's runaway investment has been brought under control, according to industry officials and analysts.

Domestic aluminium manufacturers will continue to suffer shortages and high prices of alumina - the main raw material - and electricity this year, said China Non-Ferrous Metal Industry Association President Kang Yi.

China's aluminium exports will be controlled by government policies, which will intensify competition in the domestic aluminium market, Kang said.

China removed an 8-per-cent tax rebate at the beginning of this year, and reintroduced a 5-per cent tariff on aluminium exports.

The nation cut the aluminium export tax rebate to 8 per cent from 15 per cent at the beginning of last year.

These hardships and the resulting heavy losses will force more aluminium producers, especially small firms, out of business, warned Pan Jiazhu, the association's vice-president.

"As a result, the growth of China's aluminium output will fall sharply this year," Pan told China Daily.

Domestic aluminium output will rise by 6 per cent to around 7 million tons this year, he predicted.

This will be the mildest year-on-year growth registered by China's aluminium output since 2000.

Last year saw China's aluminium output grow 20.3 per cent to 6.67 million tons, according to the association's statistics.

The figure meant China remained the world's biggest aluminium producer.

Profligate investment in the aluminium sector was cooled down last year thanks to the government's macro-economic controls, Kang said.

Investment in the sector dropped 18 per cent year-on-year to 18.25 billion yuan (US$2.2 billion) in 2004.

Last year, 33 of China's small aluminium plants were closed due to heavy losses.

Construction of 1.14 million tons of aluminium production capacity was halted in China last year.

The nation's annual aluminium production capacity totalled 94.7 million tons by the end of 2004.

Analysts warned of wider financial risks if many aluminium manufacturers go bankrupt or are closed.

"Most of China's aluminium producers expanded aggressively in recent years with bank loans," said Wang Feihong from Antaike Information Development Co Ltd, a Beijing-based metal industry consultancy.

"The risks of bad loans would climb greatly for banks if many aluminium plants closed," Wang pointed out.

The aluminium sector's profits stood at around 2.7 billion yuan (US$326 million) last year, only up from 2.3 billion yuan (US$278 million) in 2003.

"The profits were mainly created during the first half of last year. Most aluminium producers either had meagre profits or even made a loss during the second half of 2004," Wang added.

The combined profits of the aluminium and alumina sectors surged 68.2 per cent year-on-year to 10.68 billion yuan (US$1.29 billion) in 2004, mainly thanks to the alumina sector's bumper profits.

"Prices of alumina in China will remain bullish and even enjoy slight growth this year due to short supply," Pan said.

Nearly half of China's alumina demand is met by imports, Pan pointed out.

China imported 5.88 million tons of alumina last year, an increase of 4.8 per cent year-on-year.

The nation's alumina output was the second-highest in the world, having grown 14.53 per cent year-on-year to 6.99 million tons in 2004.

Despite strong demand, domestic alumina output will not increase greatly this year due to bauxite shortages, Pan said.

He forecast China's alumina output will reach some 7.7 million tons this year, up 10 per cent from 2004.

Wang from Antaike said the highly energy-consuming aluminium sector's power costs will further rise this year due to increasing electricity prices.

The price of electricity used by China's aluminium plants rose 0.04 yuan (0.48 US cent) to 0.36 yuan (4.35 US cents) per kilowatthour last year, increasing aluminium production costs by 600 yuan (US$72.5) per ton.

Government officials said recently that there will be little let up in China's electrify shortages and electricity prices will continue to rise this year due to rising coal prices.

China's removal of its aluminium export rebate will increase domestic aluminium manufacturers' export costs by 600 to 1,000 yuan (US$72.5-120.7) per ton, according to Antaike's estimates based on international aluminium prices at the beginning of this year.

The resumption of the 5-per cent tariff on aluminium exports will also increase domestic aluminium producers' export costs by 770 yuan (US$93) per ton.

Antaike predicted China's aluminium exports will drop sharply this year as a result of the two policies.

The nation's net aluminium exports stood at 1.68 million tons last year, up 34.83 per cent year-on-year.

However, Pan said the ongoing difficulties will be of long-term benefit to China's fragmented aluminium sector.

"The difficulties will accelerate the sector's reshuffle and technical upgrading," Pan said.

There are still 133 aluminium plants in China, although many small ones were shut down last year.

Twenty-three provinces in China had aluminium plants last year.

In 2004, there were 23 aluminium manufacturers in China, each with an annual output of more than 100,000 tons. The number was up from 16 in 2003.

These 23 aluminium producers accounted for 56.7 per cent of China's total aluminium output last year, up from 47.6 per cent in 2003.

Last year, the sector witnessed a slew of mergers and acquisitions led by Aluminium Corporation of China Limited (Chalco), the nation's biggest aluminium and alumina group.

Chalco paid 770 million yuan (US$93 million) last year for a 28 per cent stake in Lanzhou Aluminium Co Ltd in northwestern China's Gansu Province.

Three producers of aluminium and other non-ferrous metals in northwestern China's Shaanxi Province, central Hubei Province and eastern Fujian Province were also swallowed up by Chalco last year.

(China Daily March 31, 2005)