Aluminum Corp of China Ltd (Chalco), the nation's biggest producer of the metal, plans to shut 330,000 metric tons of outdated smelting capacity by 2011, Chalco Chairman Xiong Weiping said Wednesday.

The 330,000 tons target set by Xiong represents about 8 percent of Chalco's current capacity and accounts for about a third of the one million tons of capacity the Central Government wants to close down in the whole country as part of its plan to curb metal pollution and energy use.

China, seeking to reduce energy intensity, has ordered more than 2,000 companies, including steel and aluminum producers, to shut obsolete plants by the end of September. Chalco said Tuesday aluminum metal production in the country, the biggest maker in the world, surpasses demand by 500,000 tons.

"In the past five years, China's aluminum production has developed too fast," Xiong said. "In the next three years, aluminum demand will increase as the economy grows and aluminum replaces other metals. I expect the 20-30 percent overcapacity will disappear."

The company plans to build new low-cost facilities at Liancheng Aluminum Plant in Gansu, Xiong said.

In a move to diversify its business and to access cheaper power and raw materials, Chalco is seeking to invest in coal and power producers, and is studying projects in Southeast Asia.

"In neighboring countries such as in Southeast Asia, there are rich bauxite, coal and hydropower resources, and Chalco is actively seeking investment opportunities," Xiong said.

"We are willing to form strategic partnerships with power and coal companies by stake purchases to ensure stable and low-cost supplies."

Chalco's plans to diversify into coal, iron ore and rare earths came after higher fuel costs and aluminum overcapacity in the country crimped its profit margins.

The Beijing-based company posted a loss of more than 500 million yuan in June alone on power costs, contributing to a second-quarter loss.

"Chalco will not simply expand aluminum and alumina capacity in the future, and will focus on building our own coal production base and coal-fired or hydropower plants to produce aluminum," Xiong said. The company buys almost 20 million metric tons of coal a year.

"With electricity costs accounting for roughly 35 percent of smelting cost, we believe the company would remain under margin pressure, unless there is a strong recovery in demand," Goldman Sachs said in a report.

Chalco in February agreed to jointly develop and operate a $1 billion smelter with billionaire Syed Mokhtar Al-Bukhary in Malaysia's eastern Sarawak state where a $2.4 billion hydroelectric dam is near completion.

"Securing coal and hydropower resources is key to ensuring Chalco's cost competitiveness and protect against price fluctuations," Xiong said. It plans to build two to three coal production bases in three years, he told reporters Tuesday.

Bloomberg News

(HK Edition 08/26/2010 page3)