It is reported that Chinese aluminium smelters have agreed to pay more for imported alumina in 2010, a move that will reduce margins as they scurry to secure feedstock for new capacity.

Term prices for imported alumina will rise to 14.5 percent to 15 percent of the price of aluminium on the London Metal Exchange, currently at $2,250 a tonne, per tonne of alumina.

The pricing, on a free-on-board basis, is equivalent to $326-$337 per tonne based on Wednesday’s aluminium prices. It takes two tonnes of alumina to make one tonne of refined metal.

In 2009 the ratio was 13.5-14.5 percent for the bulk of term imports.

Smelters expecting higher production next year were keen to secure term alumina, given sharp gains in international spot prices to $340-$350 per tonne to Chinese ports versus about $265 in July.

“Chinese smelters’ output expansions are running ahead of local alumina expansions,” a smelter official said.

But only top alumina producer Aluminum Corp of China Ltd was willing to supply term alumina in the country, forcing smelters to look overseas.

Smelters had paid 15-18 percent of aluminium prices on the Shanghai Futures Exchange for Chalco’s term alumina in the past 3 years and would pay 17 percent for next year’s shipments, they said.

Chalco, with an annual capacity of 4 million tonnes of primary aluminium and 11 million tonnes of alumina, had restarted all its idle alumina and aluminium capacity, company officials said last week.

Smelter and trading sources said increased term bookings were likely to raise China’s imports of alumina, the main material for production of the metal, next year from this year’s likely imports of over 5 million tonnes.
Higher imports would trim an expected surplus in the international market next year but could weigh on domestic spot prices.

State-backed research group Antaike has predicted China’s primary aluminium production would rise 25 percent to 17 million tonnes next year after an expected 0.2 percent rise this year, due to expanded capacity.

Alumina consumption is expected to rise 23 percent to 33.9 million tonnes and production to increase 26 percent to 30 million tonnes, which would leave a deficit of 3.9 million tonnes.

Chinese spot alumina prices have risen over 30 percent so far this year, to 2,650-2,700 yuan per tonne on Wednesday.

It is said from its president on Friday that Chinese metals conglomerate, Aluminum Corporation of China , is on the lookout for opportunities to acquire mining assets overseas as it restructures amid fierce competition.

The firm will also seek joint ventures and strategic cooperation with suppliers of resources, energy and raw materials, Xiong Weiping told a conference.

China’s aluminium industry has entered a phase where there is overcapacity, cut-throat competition and low margins, he said.

“Chinalco must adopt profound business restructuring in order to maintain our leadership in the industry,” he also said.

It is reported that China’s National Development and Reform Commission, the top economic planning agency, announced on Thursday an electricity price rise for non-residential use of 0.028 yuan (0.4 US cents) per kilowatt hour on average nationwide effective Friday. The electricity tariff rise is estimated to increase the production costs of electrolytic aluminum by nearly 400 yuan per metric ton (tonne).

Currently, producing one tonne of electrolytic aluminum consumes about 14,500 kWh of electricity. Thus, given an average price rise of 0.028 yuan/kWh, the production costs for electrolytic aluminum will be raised by around 400 yuan/tonne.

“The power adjustment scheme of each province hasn’t come out yet, so the influence on aluminum producers in different regions cannot yet be estimated,” said Lan Ke, analyst of the nonferrous industry with Southwest Securities.

This is definitely not good news for large power consumers such as Chalco and Jiangxi Copper.

China’s current production costs of electrolytic aluminum stand at around 13,500 yuan/tonne, almost half of which is attributed to power.

For producers with captive power plants, including Shenhuo, Zhongfu, and Jiaozuo Wanfang, the power price hike won’t have such a strong negative impact. Furthermore, those producers will enjoy the benefit of rising aluminum prices caused by the power price hike.

Aluminum prices in the near future probably little affected by costs hikeLan said that the higher production costs caused by the electricity price rise, in turn, will push aluminum prices higher.

On Thursday, Chalco, the listed arm of China’s top aluminum producer Chinalco, raised its ex-factory price for aluminum ingots by 100 yuan/tonne to 15,200 yuan/tonne. The price has risen by 200 yuan/tonne since the beginning of November.

Meanwhile, the benchmark aluminum contract on the Shanghai Futures Exchange (SHFE) closed up 0.62 percent to 15,651 yuan/tonne on Friday.

However, market watchers also say the power price rise was widely anticipated, and has been priced into futures contracts for the power-hungry metal over the past two weeks. “Along with gains in other metals, the official announcement just became a lame duck,” Tong Changzhen, an analyst with Great Wall Futures, told Dow Jones on Friday.

Meanwhile, analysts said high stocks and an oversupply are the main factors that could slow or reserve aluminum’s upward momentum in the near and medium future.

China’s aluminum capacity currently under operation stands at around 15 million tonnes, according to statistics from Southwest Securities. As the aluminum price stabilizes above 15,000 yuan/tonne, there will be more production capacity entering into operation. Chalco forecasted in its Q3 report that China would see about 18 million tonnes of production capacity under operation by the end of this year, returning to its pre-financial crisis level.

Direct power supply talks unclear nowIn late October, Fushun Aluminum, a subsidiary of Chinalco, was approved of direct power purchase from Huaneng Yimin power plant, saving Fushun Aluminum about 0.07 yuan/kWh in electricity consumption.

It was the first trial direct power purchase in China since the Chinese government announced to carry out direct power purchase on a trial basis in 15 aluminum enterprises, 9 of which are Chinalco subsidiaries.

Chinalco achieved a cooperative agreement for direct power purchases with China Guodian Corporation on October 13. Chinalco, the largest aluminum producer in China, revealed a strong desire to achieve direct power supply for other subsidiaries by the end of 2009.

“However, at this time, even if they get direct power supply, the preferential margin won’t be large,” said an industry analyst.

As the profit per tonne of aluminum already reaches between 1,000 and 2,000 yuan, and the operation rate of power generators is rising, it has become difficult for aluminum producers to lead the negotiations for direct power supply.

It is reported that Chalco, the listed arm of China’s top aluminum producer Chinalco, announced on Tuesday that its net profit in the third quarter had tumbled 87.7 percent from the same period last year mainly due to the drop of its sales prices.

Chalco said that its net profit came to 21.3 million yuan in the July to September period, compared to 173 million yuan earned in the same period of the previous year.

Dragged on by faltering market demand, aluminum prices in China nearly declined 20 percent year on year in the third quarter to 15,200 yuan/ton.

The company’s revenue in the third quarter also slipped 10.7 percent from 19.1 billion yuan from the period one year earlier to 17.1 billion yuan.