Chalco cuts alumina prices on weak demand

HONG KONG, Aug 1 (Reuters) - Aluminum Corp of China Ltd, the world's third-largest producer of alumina, has cut spot alumina prices by 8.6 percent due to weak demand growth, sending its shares down as much as 5.7 percent. In the second price reduction within two months, the company, also known as Chalco (601600.SS), lowered the spot price to 3,200 yuan ($468.4) a tonne from 3,500 yuan, effective Friday, it said. The move followed Chalco's 16.7 percent price cuts in early June for alumina, the main material for aluminium production for which China is the top producer and consumer. Shares of Chalco hit a 16-month low, down 5.7 percent on Friday following the latest price cut. The stock recovered slightly to HK$7.59, down 5.4 percent before the lunch break. The stock has lost more than a quarter of its value since it issued a profit warning on June 20, saying that its first-half profit will slide by at least 50 percent. Chalco's adjusted price is in line with small refineries' offers at 3,100-3,200 yuan, but it is higher than the 3,300-3,400 yuan offered by big refineries in China. "This is not a surprise to us given that the aluminium production cut on power shortages means weakening demand for alumina," Deutsche Bank said in a research note on Friday, commenting on Chalco's price cut. "The rising production costs on top of lower realized alumina sales prices suggest both declining margins and earnings growth for Chalco's alumina business," it said. China's power shortages have forced electricity-hungry aluminium smelters to slow down operations. The top 20 producers representing 70 percent of the country's output have agreed to cut output by 5-10 percent during the summer. In Henan province alone, start-ups of more than half a million tonnes of new aluminium smelting capacity will be delayed to the September-October period from the planned July-August period due to power shortages, smelter officials in Henan said. China's top metals industry body has cut its forecast for aluminium production this year by 6.5 percent, or 500,000 tonnes, in response to the planned output cuts and losses during the snowstorms in January and the earthquake in Sichucan in May. That means 1 million tonnes of alumina consumption is expected to vanish. "Chalco cut prices because the market has too much alumina," a trade manager at a large aluminium smelter said. But the manager said there was little room for smaller refineries to reduce alumina prices due to increased production costs. Weiqiao Aluminium, the second-largest alumina refinery in China after Chalco, has decided to cut production in August in order to maintain its spot prices at 3,400 yuan a tonne, a trader in the company's headquarters in Shandong province told Reuters. "We are starting to gradually slow down operation rates from today," the trader said. "We cannot cut the price to Chalco's level. Our costs are 3,200 yuan a tonne." Weiqiao uses imported bauxite, the material for alumina production, as feed. Xinfa Aluminium, the third-biggest alumina refinery, is maintaining spot prices at 3,300 yuan a tonne, a sales manager said. But alumina prices may rebound after the summer because of the startups of new aluminium smelting capacity. "After August, the alumina market will be better. New aluminium capacity will come," the Weiqiao trader said. High prices for imported alumina may also help prices in China, traders said. Chinese aluminium smelters are not keen to import spot alumina and prefer to buy cheaper materials from local refineries. But they are still taking term imports at around $500 a tonne, including costs of freight and insurance. The term imports prices equalled to about 4,000 yuan a tonne. ($1=6.831 Yuan)