Chinese Aluminum Producers at the Brink of Output Cuts

Published on Saturday, 22 May 2010 23:04 Written by Danny Miller

New York, May 22^nd (TradersHuddle.com) – Aluminum prices moved higher on Friday as the euro rallied on traders covering their shorts on speculation the European Central Bank will intervene to support the currency.

Aluminum prices have dropped 11% this year on the London Metal Exchange on concern the European debt crisis will derail the global economic recovery. In Shanghai the metal has lost 13% as traders in China, the largest producer of Aluminum in the world, have sold their positions on concern over the European sovereign debt crisis and the Chinese government efforts to cool down economic growth.

The lower aluminum prices along with new power rates that will take effect in June will rein in overcapacity in China, as some Chinese smelters will see power rates increases of up to 100%. The measures to raise power rates may affect 6% or of smelting capacity in China.

China is cutting overcapacity as stockpiles of the metal in warehouses monitored by the Shanghai Futures Exchange have jumped 61% after aluminum producers increased production on expectations of higher demand as the global economy will recover.

Analysts believe that with the low aluminum prices and with the increased power rates, Chinese smelters should be operating below production cost, losing money. By the second half of the year, the situation will force producers to cut capacity in order to provide some support to pricing and to allow stockpiles to drop.

The output cuts in China will certainly benefit aluminum prices, as they will likely find support. Alcoa (NYSE:AA), the U.S. largest aluminum producer and big exporter to Asia, will also see some benefit, as shares will likely find support and perhaps start a reversal. Alcoa shares have lost 29.6% year to date, as aluminum prices fell and global economic growth fears increased.