Monthly Archives: June 2010
The following article is from today’s Financial Times. This is likely to have repercussions for Chalco in a numbe of areas. Naturally the Queensland Government is likely to have a thing or two to say about this announcement. But I suspect it won’t be long before commodities and stock analysts around the world begin to re-assess their positions on Chalco shareholdings. I will have more to say about Chalco in another post tomorrow.
China’s Chalco, the world’s second-largest aluminium producer, has pulled out of a A$3bn (US$2.4bn) deal to develop a bauxite refinery in Australia, blaming a drop in aluminium prices and difficult global conditions.
Chalco, the Hong Kong-listed subsidiary of Aluminium Corporation of China, won a permit to mine the high quality Aurukun bauxite deposits in northern Queensland on the condition it build a processing plant.
However, Chalco had been seeking to revoke this commitment given the fall in aluminium prices and the higher-than-expected cost of building a refinery in such a remote location.
When the decision was made to go ahead with the Aurukun project two years ago, world prices for aluminium were at US$3,000 a tonne, compared to below US$2,000 today.
This would have been Chalco’s first investment in Australia – its parent’s offer to inject US$19.5bn into Rio Tinto last year was turned down, which put a strain on Sino-Australian relations for a while. Chalco’s decision to shelve the bauxite deal followed lengthy talks with the Queensland state government, ahead of the June 30 deadline for the final agreement.
Deteriorating conditions for aluminium meant Chalco was not prepared to build a processing plant and the Queensland state government reaffirmed that there would not be a mine without a refinery.
In awarding mining licences, the state government’s emphasis has been on adding value to create more jobs and investment as it is mindful of the past tendency for miners to export minerals from Queensland to be processed into more expensive metals offshore.
While the original deal is dead, both sides on Thursday affirmed their strong common interest to develop the Aurukun bauxite deposit given its strategic importance.
Andrew Fraser, Queensland state treasurer, said: “What we want to see is the resource developed, the mine take place, jobs for the Indigenous community. And so we need to start again, given that that agreement has now changed.”
He added: “They’ve [Chalco] has put a lot of investment into the work so far and so we want to see if we can reach a new agreement that meets all of those objectives that the Government had in the first instance.”
Xiong Weiping, Chalco chairman, said: “We look forward to discussing new development and investment options for Chalco with respect to the Aurukun resources, as we continue to seek opportunities to invest in the resources sector in Australia and Queensland.”
Research that we have done over the last few days shows that there is a serious amount of aluminium capacity set to close very shortly.
According to our research, Henan Province will lose about 700kt of capacity, across 13 smelters. Other smelters in Guizhou, Yunnan, Hubei and Shanxi will also cut back, or have already started.
All of these cuts are due to the government’s call to reduce energy consumption through the rest of this year. And the driver behind that call is that China is now in the final 6 months of the 11th 5-year plan. The Communist Party is very keen to hand in a good report card, in order to provide a strong base for the next 5-year plan, and to augment the position of the next generation of leaders.
Add to these cuts another 700kt of old, inefficient capacity which is already earmarked to close, and the total cuts start to nudge 2 million tonnes. Of course, more than half of that will return to the market in 2011, but it’s still a major correction for 2010.
Chinalco’s Fushun plant, in Liaoning province in China’s north, is reportedly set to close its doors by the end of this year.
This 200kA plant, with a capacity of about 250,000 tonnes, was hit by the cutbacks in production in 2008/2009, with production last year reaching only 76,000 tonnes.
The closure of a relatively small plant should not normally create much interest. But perhaps this closure is a sign of things to come for its parent company. This plant was only finished in 2006, and had an expansion of 60,000t which was due to be completed this year. The plan was for an additional 180,000t to be added next year.
That plan is now in the bin. Chinalco has been seeking buyers for the plant, with no success. One insider told us that if they cannot find a buyer, the plant will be turned into an “aluminium smelting museum”.
Chalco has been having numerous problems in recent years. The most visible one to Westerners was its tilt at Rio Tinto. But this former behmoth of the Chinese aluminium industry is now in financial ill-health, thanks to higher power costs, lower metal costs and poor management.
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