China to save aluminum industry

China's biggest aluminum producer, China Aluminum Corporation, reports this week that it expects a large deficit from its business last year. That's no surprise, given the overcapacity in the industry.

The government is planning on consolidation in the aluminum sector, but one Shanghai analyst says the government should be careful about the kind of help it gives.

China Aluminum Corporation didn't say how much it might have lost last year, but did note that the price of aluminum has dropped by 7 percent. Figures show China's production volume of aluminum has reached 220 million tons, but that is only about 70 percent of the industry's production capacity, cutting into profits. Still, one analyst says investors remain optimistic about future demand.

Yang Zhongning, Investment Consultant, Guodu Securities Company, said, "Japan's aluminum consumption per capita is 35 kilograms a year, higher than the world average, and the American figure is 30. But China is only half of that. Many companies see a big margin of demand, and that's why production capacity has expanded so much."

China is offering subsidies to encourage company mergers and cut excess capacity. The problem is that well off companies don't want to be dragged down by being forced to combine with inefficient companies. Instead, they prefer to build new production lines in west China, where electricity, the industry's main cost, is cheaper by around 50 percent. Yang says the authorities should be cautious about forcing this kind of merger.

Yang Zhongning, Investment Consultant, Guodu Securities Company, said, "The problem is a number of companies will join the game when the market looks good. But when the market turns bad, our government is always trying to save them. If the companies are convinced that the government will always be there to save them, they will become more careless about taking risks."

China's authorities have targeted bringing the country's top ten aluminum producers into position to supply 90 percent of the national market by the end of 2015.