Chalco recently posted its first half results and not surprisingly showed greater net losses than the same period last year. To avoid being de-listed from the exchange, Chalco last year disposed of several unprofitable assets to its parent company Chinalco, but they are unable to do the same in 2014. Therefore, a greater net loss seems inevitable given the weaker metal price.

We agree with the statement made by Chalco’s management in their interim report that the loss is mainly thanks to the low metal price. Merely looking at the primary aluminium sector, Chalco produced a total of 1.63 million tonnes in the first half, down by 19% YoY. Meanwhile the Shanghai 3-month future price declined by 10% on average which resulted in a 27% contraction of revenue and this is just in line with the reported number. Chalco management advocated that they took lots of measures to control the cost and lead to a 3% saving on producing aluminium. So far, we think the loss sounds reasonable and the retreat in volume and price is the major cause for the disappointing performance. However in contrast, Hongqiao Group gained a 28.6% increase in revenue over the same period despite gross profits dropping by 4%.

We are not accusing Chalco of being complacent in turning the company around, especially considering the increased burden of having more obligations for social stability etc. than its competitors. Rather, we are hoping that Chalco will change its mind and attempt to boost development rather than merely control the costs. Alcoa, which was also suffering losses in the primary metal sector actually set a good example for Chalco. To break away from the soft commodity market, Alcoa is moving its strategic center to high-value semi products, which are applied to aero and auto markets and have great potential for metal producers for further development. We admit 600KA technology designed by Chalco is important in cost control and energy saving, but it never provided opportunity for diversification. We would like to see Chalco take advantage of its R&D center and invest more on downstream and make determined efforts to transform its unprofitable assets to produce high-value products. Either way, there is a long way to go.

Looking ahead, we anticipate Chalco will perform better in the 2^nd half, given that aluminium prices have been well above 14,250 RMB/t, in addition to the substantial government subsidies. The recovering ex-China demand will undoubtedly continue to assist London prices to go up which will further support Shanghai prices to run at a higher level than the first half of the year. The latest news about Xinfa’s accident shocked the market and will also push up aluminium prices for a while. All the fundamentals are supporting Chalco and its peers, so let us see whether Chalco can pull itself out of the mud.