China measures set to boost aluminium supply

China's decision to support its domestic industry through cuts to the price of power and taxes looks set to boost aluminium and iron ore production, even as global markets struggle to digest excess supply.

China's cabinet said on Wednesday it would reduce power prices for coal-fired power plants and cut the resources tax it charges iron ore miners. Iron ore, a key steelmaking ingredient, is below $50 a tonne, down from $70 in three months, while aluminium has fallen more than 4 per cent this year.

The cut in power prices should help support China's state-owned aluminium producers, who rely on the grid for power that makes up a large portion of their costs. That will provide little relief for prices of the metal, used in everything from aircrafts to cars, and only exacerbate a surge in Chinese exports on to world markets.

That could add further pressure on the global industry, which includes companies such as Alcoa in the US, Rusal in Russia and Anglo-Australian group Rio Tinto.

"In an environment of oversupply, these moves generally lower the prices required to force needed curtailments," Citigroup said.

The power price cut allows China's state-owned aluminium producers to benefit from lower coal prices, according to Eoin Dinsmore, an analyst at CRU. Many private producers have already enjoyed lower costs due to having power stations on site to produce electricity from coal, he said.

"It's going to drop production costs by about 2 per cent, not an enormous benefit, but it sends a signal that they want to continue to give these guys support," Mr Dinsmore said. "They are not showing the appetite to rein in the industry at the moment."

Chalco, the country's biggest aluminium producer, could be a key beneficiary. The state-owned company lost Rmb16.2bn last year. Its shares rose 9.87 per cent on Thursday after the government's announcement.

On-grid tariff rates for coal power plants were reduced by about 5 per cent in Wednesday's decision. About half of Chinese smelters rely on power from the grid, according to Citi.

China's aluminium smelters have been reluctant to curtail output, Alcoa's chief financial officer Bill Oplinger said this week. The US aluminium producer now expects a surplus of 326,000 tonnes this year, compared with a deficit it had predicted in January.

Chinese net aluminium and product exports are set to exceed 5m tonnes this year, which represents about 18 per cent of the rest of the world's consumption, according to Citi. In the first two months they surged by 79 per cent.

"Structurally, the market is oversupplied, despite the leakage of metal into overseas markets," Paul Adkins, managing director of AZ China, a consultancy, wrote. "Demand sectors have seen no magic bullet, and the recent actions by the Chinese government will only keep plants alive longer. So the pressure on metal price is all downward."

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