Too Much Metal

　　Aluminum Corp. of China Ltd. (CHAL CO)， thecountry’s largest aluminum producer， shocked investorsagain by posting losses of 1.85 billion yuan ($301.3 million)，according to the company’s third-quarter financial reportreleased on October 30. This is the second year CHALCOhas suffered a loss.

　　Wang Yong， an analyst with CITIC Securities Co. Ltd.，said overcapacity and low prices were CHALCO’s biggestenemies. The company recorded losses of 8.23 billion yuan($1.34 billion) in 2012.

　　After the global financial crisis， China’s non-ferrousmetals industry saw impressive growth plummet to rockbottom， with no sign of recovery over the past five years.

　　While many companies in the industry had tried variousways to extricate themselves from the slump， few， if any， hadsucceeded.

　　Offloading assets

　　CHALCO had maintained stable growth since it wasestablished in September 2001. But affected by the globalfinancial crisis， it lost 4.65 billion yuan ($742.67 million) in2009， and then earned negligible profits in 2010-11. But in2012， the company again suffered huge losses.

　　To make up losses， CHALCO began selling its assets inthe first half of 2013. The most important sale was with theSimandou open-pit iron ore project located in Guinea， WestAfrica. The Simandou project is the biggest iron ore projectin the world.

　　“The Simandou project involves big investment with along construction period， creating funding pressure， so thecompany had to sell its interests to cut capital expenditure，and reduce interest expenses，” reported CHALCO. ChalcoIron Ore - its investing entity for the Simandou project -recorded net losses of 12.5 million yuan ($2.04 million) in2012.

　　Sale of assets in the first half of 2013 has significantlyimproved CHALCO’s financial performance. According to itssemiannual report， in the first half of 2013， it recorded lossesof 670 million yuan ($109.12 million)， much less than the8.23 billion yuan ($1.34 billion) in the same period last year.However， its financial report for the third quarter shows thatthe losses have again ballooned. If the losses continue thisyear， the listed CHALCO will be given “special treatment” bythe stock exchange.

　　If the Simandou deal can be concluded by year end， itcan bring CHALCO 3.7 billion yuan ($602.61 million) in profits，enough to make up the entire year’s losses.

　　However， the deal’s pending success does not meanCHALCO can sit back. Cai Hongyu， a researcher with ChinaInternational Capital Corp. (CICC)， thinks CHALCO will continueto face much pressure because prices of aluminumproducts are set to remain low.

　　CHALCO is not alone in its financial dilemma， as thewhole Chinese aluminum industry is suffering. There are 75listed non-ferrous metal companies in the A-share market.According to their financial reports for the third quarter， twothirdsof these are losing money.

　　Overcapacity

　　Figures from the National Development and Reform Commissionshowed that in the first three quarters of 2013， thenon-ferrous metals industry earned total profits of 121.5billion yuan ($19.79 billion)， a year-on-year decline of 6.8percent. In the third quarter， 20.7 percent of the country’snon-ferrous metal companies were losing money， up by0.4 percentage points over a year ago. They recorded totallosses of 10.64 billion yuan ($1.73 billion)， up by 3.9 percentcompared with the same period last year.

　　A burning question that remains is that if the non-ferrousmetals industry entered stagnation because of the globalfinancial crisis， why has it not recovered， given the fact thatthe Chinese economy has resumed growth five years afterthe crisis？

　　Chen Quanxun， Chairman of the China Nonferrous MetalsIndustry Association (CNIA)， said the answer is that nonferrousmetal companies have been expanding and causedserious surplus capacity.

　　During the 11th Five-Year Plan (2006-10) period， Chinahad already become the biggest non-ferrous metals producerin the world. At the time， there was an appeal for strictcontrol of fast-growing investment in the non-ferrous metalsindustry. The Chinese Government also issued policies tocurb overcapacity and redundant construction in industriesincluding non-ferrous metals， so as to guide sound industrialdevelopment.

　　However， these policies were not effectively implementedand surplus capacity in industries of lead， zinc， copperand electrolytic aluminum became an increasing worry. Accordingto CNIA figures， excessive supply of aluminum aloneis 773，000 tons and these excesses will restrict recovery ofthe non-ferrous metals industry for some time to come.

　　How should the non-ferrous metals industry resumeits growth？ Chen thinks that actions like CHALCO’s sellingof assets is not a permanent solution and would rather seereduction of surplus capacity. On October 15， the StateCouncil issued a guiding recommendation on reducingsurplus capacity in the non-ferrous metals industry， withelectrolytic aluminum being among the five key industriesmentioned.

　　According to the 12th Five-Year Plan (2011-15) for theNon-Ferrous Metals Industry formulated by the ChineseGovernment， by 2015， China’s top 10 aluminum companiesshould contribute 90 percent of the country’s total output.But at present， concentration of the top 10 aluminum companiesis less than 40 percent， well below target.

　　Since the electrolytic aluminum industry is a big polluterand high energy consumer， and faces the most seriousinstances of overcapacity， reorganization of the industrymust be accelerated.

　　Chen said to fundamentally solve the overcapacity problemin China’s non-ferrous metals industry， the governmentshould first control total production capacity. This wouldmean shutting down all unapproved electrolytic aluminum，as well as lead and zinc projects under construction， orplanned to be built， that go against state industrial policies.

　　The government should also support development ofenterprises that observe the law and conform to nationalpolicies. It is expected that in the coming months there willbe frequent new policies related to shutdown of outdatedcapacity and reorganization of the industry.