On August 2nd, the Ministry of Industry and Information Technology published the performance of nonferrous metal industry in the first half of 2011. Relevant data showed that due to cost increase, aluminum smelting enterprises (including aluminum and aluminum oxide) fulfilled 5.22 billion yuan in profit in the first half of the year, down sharply by 23.6%compared with the same period last year. Industry insiders pointed out that in the second half of the year the aluminum industry will have to face a grim situation.

According to data from the Ministry of Industry and Information Technology, the main reason leading to sharp decline in the profit of the aluminum industry is the continual rise in the cost of aluminum. According to preliminary estimate, in June after the upward adjustment of electricity price in 15 provinces in China,electricity price rose by 0.02 yuan/kwh on average, coupled with the increase in the price of carbon element products, the manufacture cost of aluminum per tonne rose by over 300 yuan,as a result the profit margin of aluminum enterprises further narrowed; at present enterprises in Central and East China regions and Sichuan,Guangxi, and Guizhou are already in loss or small profit status.

Industry insiders told the reporter that the key raw materials for large scale industrial production of aluminum are aluminum oxide and carbon element, in which the cost of raw material aluminum oxide accounts for about 35% of production cost; the main production technique is electrolysis method, and the production process needs to consume huge volume of electricity. In the first half of the year, the prices of aluminum oxide, carbon element and electricity price rose to varying degrees.

According to data from the Customs, the import price of aluminum oxide in May is 456.2 USD/tonne, up by 24.8% over that in the same period last year, and up by 3.9% on top of that in previous month, the average import price reached the highest level since November 2008; furthermore, the domestic price of aluminum oxide is also rising, in June alone the accrued price increase has exceeded 7%.

Relevant data show that in 2010 China’s actual capacity of aluminum was above 21 million tonnes, but the capacity usage rate is below 70%; the newly added production capacity in 2011 is around 4 million tonnes. However, at present no significant change has occurred in market demand and supply, therefore the aluminum industry will continue overcapacity situation in this year.

In fact, the overcapacity in the aluminum industry has aroused concern from all related circles. The Ministry of Industry and Information Technology published “Urgent Notice on Curbing Overcapacity in Aluminum Industry and Repeated Construction and Guiding Healthy Development of the Industry” on April 20th, requesting all regions and departments to clean up and impose stringent control over planned aluminum projects, cancel all preferential policies introduced by local governments in favor of aluminum industry, and prohibit blind expansion of aluminum production capacity in any way. It has been learned that, by the end of the first 10 days in July, there were already 23 planned aluminum projects across the nation which were suspended by relevant government departments. Their original estimated capacity for construction was 7.74 million tonnes, totaling 7.7 billion yuan in investment budget.

According to an analysis report from China Post Securities, 9 ministries and commissions including the Ministry of Industry and Information Technology have adopted a series of measures to phase out backward production capacity in order to suppress overcapacity, and published the list of enterprises scheduled to eliminate backward capacity in 2011, the closed down and suspended capacity of aluminum production has reached 619,000 tonnes; nevertheless, this is undoubtedly insignificant compared with the tremendous capacity of aluminum industry. What’s more, the list for controlling aluminum production capacity in all provinces released by 9 ministries and commissions headed by the Ministry of Industry and Information Technology does not include regions that have shown fast construction of aluminum production capacity such as Xinjiang, there still remains potential motivation for large-scale expansion of aluminum production capacity.

According to the above industry insider, overcapacity will increase the possibility of future decline in aluminum price, and result in further shrinkage in the revenue of aluminum enterprises.