China Chalco's Shanghai listing to enhance vertical integration

BEIJING - Aluminum Corp of China Ltd's (Chalco) planned issuance of 1.24 bln A-shares on the Shanghai Stock Exchange will be positive for the company as a strengthened capital base will support Chalco's credit metrics and streamline upstream and downstream operations for China's largest aluminum and alumina firm, Fitch Ratings said.

'This issuance will raise 8.2 bln yuan to acquire the minority/majority stakes in its two mainland listed units -- Shandong Aluminum and Lanzhou Aluminum. We view the mergers positively, as they will provide improved integration between the firm's upstream bauxite, refining and downstream smelting operations, underpinning its leading position in the industry's consolidation process,' Fitch said in the research note.

Fitch said Chalco has taken steps to expand its downstream primary aluminum production capacity by mergers and acquisitions in recent years, with its output of primary aluminum reaching around 1.8 mln tons in 2006, representing an increase of more than 230 pct compared to 2003.

'Chalco's increasing exposure to its downstream primary aluminum operations has benefited the company, supporting stable revenue growth notwithstanding a declining alumina price,' said Danny Chen, associate director of Fitch's Corporate ratings team in Beijing, in the note.

Looking ahead, Chalco aims to buy three more smelters -- Baotou Aluminum, Liancheng Aluminum and Tongchuan Xinguang Aluminum -- from its parent, and hence will expand its primary aluminum capacity to 3.4 mln tons in 2007, representing a 25 pct increase year-on-year and accounting for around 35 pct of the Chinese domestic market, the note added.

In the refining sector, China's domestic production capacity of alumina accelerated in 2006 and the increasing supply negatively impacted the spot price of alumina.

To maintain its competitiveness in the Chinese market, Chalco has announced four consecutive price cuts since August 2006 and sequentially lowered its contract price of alumina by 57.5 pct to 2,400 yuan per ton from a historical high of 5,650.

With more domestic production capacity of alumina coming on-stream, Chalco's monopoly position in the supply of alumina will be further weakened, which may see its market share falling from 90 pct in 2005 to around 55 pct in 2007.

Fitch expects the primary aluminum business to provide more than 60 pct of Chalco's revenues in 2007, compared with 35 pct in 2005.

Last week, Chalco raised spot prices for alumina by 50 pct to 3,600 yuan per ton, effective immediately, citing upside price pressure from its competitors.

(1 usd = 7.8 yuan)