Aluminum Heads for Second Weekly Gain on China Output Cut Plan

By Feiwen Rong

July 11 (Bloomberg) -- Aluminum in London headed for a second weekly gain after China's top producers agreed to cut output by as much as 10 percent, sending the light metal to a record yesterday.

Aluminum Corp. of China Ltd. and another 19 companies in China, the world's largest producer, signed an accord yesterday to cut output by 5-10 percent because of a power shortage in the country, a government official said. Prices rallied as much as 6 percent to an all-time high at $3,380 a ton yesterday.

``Because of the large energy component of the production cost, aluminum remained a favored metal in the medium-to-long term outlook despite a short-term supply glut,'' Li Rong, chief analyst at Great Wall Futures Co. in Shanghai, said by phone.

Aluminum for delivery in three months traded unchanged at $3,290 a ton at 10:54 a.m. in Singapore in after-hours electronic trading on the London Metal Exchange.

The metal, used in aircraft and beverage cans, has more than doubled in five years as rising power prices buoy output costs, queezing profit margins at companies including Alcoa Inc., the largest U.S. producer. Energy accounts for 30 percent to 40 percent of the cost of producing aluminum.

Lost Production

The top 20 aluminum smelters in China account for about 70 percent of the country's capacity of about 14 million tons, Leon Westgate, a London-based analyst at Standard Bank Plc wrote in a report yesterday. A 10 percent cut would amount to just under 1 million tons of lost production annually, or around 80,000 tons per month, he said.

``A prolonged cutback would see the market shift from surplus to deficit quite easily,'' said Westgate, who estimated the global surplus of the metal at 284,000 tons this year.

Still, aluminum prices are subject to selling pressure in the short-term from Chinese smelters looking to lock in profit at a time of domestic market oversupply, said Great Wall's Li.

``If the aluminum futures in Shanghai rally to above 20,000 yuan ($2,925) a ton, I think a lot of the smelters would be enticed to sell their output in advance,'' Li said.

China's exports of aluminum and alloys surged 43 percent to 123,538 tons in June, from a month earlier, preliminary customs data showed yesterday. That's the highest since August 2006, according to Bloomberg data.

Aluminum for September delivery traded in Shanghai gained 0.7 percent to 19,705 yuan a ton at 10:56 a.m. local time. It has gained 11 percent this year, lagging behind the 37 percent gain in the London benchmark.

Among other metals traded on the LME, lead fell 1.9 percent to $1,946 a ton, copper added 0.4 percent to $8,266 a ton and zinc fell 3.4 percent, to $1,922 a ton. Nickel and tin had not traded as of 10:42 a.m. in Singapore.

To contact the reporter for this story: Feiwen Rong in Singapore at frong2@bloomberg.net