Nine ministries and commissions, including the Ministry of Industry and Information Technology, jointly issued an emergency notice a few days ago and asked all localities to immediately halt the proposed 7.74 million tons of electrolytic aluminum projects with a total investment of 77 billion yuan. After the news was announced, aluminum companies on the A-share market rose on the 21st, leading shares of Xinjiang Zhonghe and Changlv rose 6.2% and 4.9% respectively.
According to the Ministry of Industry and Information Technology, by the end of 2010, China's electrolytic aluminum production capacity was 23 million tons, while the actual output was 15.6 million tons, and the utilization rate of equipment was only 70%. If all the proposed projects are put into production, the national electrolytic aluminum production capacity will exceed 30 million tons at the end of the “Twelfth Five-Year Plan†period, and the contradiction of excess production capacity will further intensify.
Before electrolysis of aluminum, steel industries trapped in severe overcapacity were most typical of steel. In May 2009, the Ministry of Industry and Information Technology had issued an emergency report to curb excessive growth in steel production. Since then, the regulation of the steel industry has been upgraded step by step, and measures such as reducing bank credits and implementing differential electricity prices have been used to achieve actual “killing†measures.
Like steel, the problem of overcapacity in electrolytic aluminum was exposed as early as 2009. In the previously issued plans for adjustment and revitalization of non-ferrous metals, it was proposed that in principle, new, modified or expanded electrolytic aluminum projects will not be approved in the next three years. However, the implementation of this plan was not satisfactory. In the following year, domestic electrolytic aluminum production capacity still increased by more than 25%.
Continuous expansion makes electrolytic aluminum the weakest industry in the non-ferrous metals industry. In the first 11 months of 2010, the domestic aluminum smelting industry's sales profit margin was only 3.59%, which was less than 1 percentage point higher than the bottom iron and steel industry. To avoid electrolytic aluminum from repeating the mistakes of the steel industry, the ministry's notice was a crucial one.
“From past experience, the policy of curbing the expansion of electrolytic aluminum production capacity will often be discounted,†said Ye Xuan, chief analyst of China Non-ferrous Metals Industry. In particular, in some regions where regional revitalization plans are implemented, companies may use other names to declare electrolytic aluminum projects.
In Ye Xie's opinion, in addition to administrative measures, the pressure from the market is actually more effective. For example, China Aluminum Corporation, the largest aluminum electrolytic company in China, has shifted its investment focus in recent years. Chinalco chairman Xiong Weiping told reporters before that although the average price of aluminum futures in the previous period rose by 20% in 2010, the profit margin of China Aluminum's electrolytic aluminum sector was only 0.7%, which is basically in a meager state. Most of the over 10 billion yuan in capital expenditures arranged by Chinalco this year is invested in upstream resources, such as coal.
Ye Hao said that compared with excess capacity, electrolytic aluminum is facing another major challenge is the expected increase in electricity prices. The newly-convened executive meeting of the State Council stated that the reform of electricity prices should be steadily advanced this year, and this will accelerate the transfer of electrolytic aluminum production capacity to western regions where energy and resources are abundant. With the gradual optimization of the industrial layout, the domestic electrolytic aluminum industry's profitability is expected to be improved.
However, as far as this year is concerned, although the proposed project has been halted, the contradiction in excess capacity of electrolytic aluminum is still difficult to solve. China Aluminum predicts that domestic primary aluminum production in 2011 will reach 19 million tons, but consumption will be only 17.7 million tons. “From a year-round perspective, when the electricity supply shortage caused the production of electrolytic aluminum to be limited and stimulated the aluminum price to climb, the aluminum industry stocks may have phased investment opportunities.†Ye said.
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