China Targets Aluminum Sector in Push Against Overcapacity

By CHUIN-WEI YAP BEIJING -- China's cabinet, which has long warned it wants to curb excess capacity in key industrial sectors, set a ban on new aluminum smelters for three years. The State Council, China's highest executive body, also issued new rules to contain overcapacity in seven other sectors, including revisiting a yearslong campaign to curb steel output. China is worried that excess industrial capacity could lead to company closures and layoffs, which could slow the economic recovery. A worker shows an aluminum rod at a store in Shanghai in August. Premier Wen Jiabao said in September that excess industrial capacity due to slower external demand is his biggest worry as China's economy continues to recover. Wednesday's move doesn't change China's broad policy focus on stimulating the economy, but shows that the government is increasingly dealing with excesses of its expansionary policies. A failure to rein in excess capacity "will make it hard to prevent vicious competition in the market and raise profits, and will lead to shuttering of companies, or insufficient use of capacity, layoffs, big increases in bad assets held by banks," the government said in its sternest warning yet on the subject. Aluminum producers in China, which is both the world's largest producer and biggest consumer of the metal, have massively increased production capacity in recent years, taking advantage of rising prices before the economic crisis. The cabinet's move to ban new capacity in aluminum, and to trim outdated capacity at existing smelters -- first proposed by industry officials in February -- is seen as a way to boost aluminum prices and to root out smaller, inefficient aluminum smelters in a sprawling, energy-guzzling industry. But the market largely shrugged off the news Wednesday, a day before China's eight-day national holiday break, and aluminum prices rose only slightly on the London Metal Exchange. Aluminum prices have been major laggards in a wider rally among base metals this year, rising 23% so far, while copper prices almost doubled and zinc prices climbed 42%. "The worry in the industry isn't so much about new capacity, it's about the existing overcapacity," said Wang Zhouyi, senior base-metals analyst for Shanghai Cifco Futures. While the cabinet wants to limit capacity at inefficient aluminum smelters by 800,000 tons over one year, such measures might be cold comfort for a market faced with capacity nearing 20 million tons, and demand projected this year at around 16 million tons. The ban isn't the first time China's cabinet has sought to control aluminum output. It issued an industry-revitalization plan earlier this year with broad aims to consolidate the industry and target overcapacity, but its efforts have so far had limited success, with unbridled production swiftly returning every time prices show signs of inching up. "Aluminum smelters are very flexible," said Wang Lin, an aluminum analyst with CRU, a metals consultancy. "They can pop up very fast, usually when prices recover, and they're quite difficult to control." Uncontrolled aluminum output also has been an irritant for policy makers for environmental reasons. Aluminum production is the most energy-intensive among base metals, with electricity charges accounting for nearly 50% of input costs. As the domestic economy recovers, new problems are arising from the unprecedented amount of credit released to bolster growth. While overcapacity has been an issue for years in key traditional industries such as steel and aluminum, warnings by the State Council in August of overcapacity and redundant construction in such advanced industries as wind power and polysilicon were Beijing's first toward more high-tech sectors. —Terence Poon, Juan Chen and Yue Li contributed to this article. Write to Chuin-Wei Yap at chuin-wei.yap@dowjones.com