Chalco H1 net dives; power costs weaken outlook

By Alison Leung

HONG KONG (Reuters) - Aluminum Corp of China Ltd (601600.SS: Quote, Profile, Research, Stock Buzz), the world's No.3 alumina producer, said late on Friday its first half net profit fell by about two-thirds, dented by high production costs, output disruptions and oversupply in the aluminum market.

Chalco (2600.HK: Quote, Profile, Research, Stock Buzz), China's top aluminum maker, is likely to face a tougher second half as power tariffs are expected to rise further and the oversupply situation will keep a lid on prices of aluminum, and of alumina which is used to produce it.

Production disruptions caused by nationwide power shortages and snowstorms in January-February also hurt profitability.

"The production, operation and development of the company will face challenges, mainly due to the great cost pressure driven by high prices of mineral resources, coal, electricity, oil and other energy sources as well as transportation cost," chairman Xiao Yaqing said in a statement.

"The fierce competition in domestic mineral resources and non-ferrous metals market are bringing difficulties for production, supply and sales of the Company," Xiao added.

China's smelting capacity is expected to rise by almost a fifth this year to about 19 million tonnes, as smelters build new plants despite higher construction costs.

aluminum MAL3 on the London Metals Exchange rose almost 30 percent in January-June, mainly boosted by energy costs, but has dropped 17 percent from a record high early last month as investors worry about future demand.

Chalco said the average price of alumina, one of Chalco's main products, sold to external customers fell 4.52 percent in the first half to 2,830 yuan per tonne. Average aluminum price dropped 5.64 percent to 16,241 yuan a tonne.

The company has cut spot alumina prices twice since June by a combined 24 percent due to increased production in China.

WEAKER TREND

Analysts said recent export tax hikes on energy intensive materials, including aluminum alloy, would constrain exports of Chinese aluminum products, adding to domestic supply and depressing prices.

Facing fierce competition and scarcer raw materials, Chalco is diversifying overseas by investing in the Aurukun bauxite mining project in Australia's northeast and in several smelter projects, including Saudi Arabia.

State-owned parent Chinalco teamed up with Alcoa (AA.N: Quote, Profile, Research, Stock Buzz) of the United States to pay $14 billion for a stake in Rio Tinto Plc (RIO.L: Quote, Profile, Research, Stock Buzz), which is the target of a near-$150 billion bid from rival miner BHP Billiton (BHP.AX: Quote, Profile, Research, Stock Buzz) (BLT.L: Quote, Profile, Research, Stock Buzz).

Chalco reported January-June net profit of 2.41 billion yuan ($351.9 million), down from a restated 6.97 billion yuan a year earlier, worse than suggested in the company's warning in June that its interim net profit would slide by at least 50 percent.

Its revenue fell 7.14 percent to 39.61 billion yuan as alumina and primary aluminum prices declined, while its total cost of sales rose 9.25 percent due to increase in production cost as raw and ancillary materials prices surged.  Continued...