China's aluminum inventories reached a record high this week, caused by rapidly growing supply and weak demand in the country, resulting in sharp price drops, an expert said.
The country's overall aluminum stockpiles climbed to 1.25 million metric tons on Monday, almost double the level during the same period late year, according to Myyouse.com, a Shanghai-based commodities information consultancy.
On January 10 last year, the nation's aluminum stockpiles stood at about 700,000 tons, said Li Xun, an analyst at the consultancy.
He told China Daily the excessive supply in China's aluminum industry will continue at least for the first half of the year.
"The aluminum price will fall by 200 yuan ($32) to 300 yuan a ton during this week," he said. "That is considered a dramatic price drop in the market."
Domestically produced aluminum was listed at 14,530 yuan a ton in trading in Shanghai on Thursday, 160 yuan down from Wednesday, according to Myyouse.com. The price decline in Wuxi, another major aluminum trading center, was even sharper - 180 yuan a ton over one day.
Li said there are many reasons for the increasing stockpiles, but the major one is the new production capacity in western areas of China.
Facing a gloomy economy, many international aluminum companies decided to reduce capacities in recent years to survive amid shrinking demand and falling prices.
However, many Chinese companies continued to increase their capacities and output, leading to even fiercer competition in the market.
About 90 percent of the new electrolytic aluminum production capacity has come from western China since 2009. In 2011, China's 3.4 million tons of new production capacity for electrolytic aluminum was mainly centered on the Xinjiang Uygur autonomous region and Qinghai province in Northwest China, according to the China Nonferrous Metals Industry Association.
Li said the new projects approved in Xinjiang began production, which could not be absorbed by the market, leading to the current situation.
Also, before Spring Festival, transport links from west to east were affected by bad weather, adding more difficulties to easing aluminum stockpiles.
"If aluminum producers in eastern China don't reduce their output, the oversupply will continue even if consumption rises," said Li. "The supply increase is far greater than consumption growth in China."
He said the government had not taken effective measures to eliminate small-scale aluminum producers that lack advanced technology.
"It might be a good time for the processing companies to purchase aluminum as their raw material," he said.
He predicted the aluminum price would stay at about 14,500 yuan to 15,000 yuan a ton during the first half of the year.
However, an insider from a leading domestic aluminum processing company said a price fall cannot contribute much because processing companies usually have long-term price contracts with material suppliers.
"The aluminum cost is not a key factor for profits. The processing cost is," the insider said.
Profits of China's nonferrous metal industry dropped 34 percent year-on-year to 39.3 billion yuan in 2012, according to figures from the Ministry of Industry and Information Technology.
The aluminum sector saw the biggest profit drop - a 92.7 percent decline to 930 million yuan in the past year.
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