As if we needed any reminder of how close the link is between energy and aluminum smelting a Financial Times report this week reveals details of how Beijing has engineered the transfer of assets between a cash strapped power generation group, the State Power Investment Group (SPIC ), and a loss-making alumina and aluminum smelting group Aluminum Corp of China Ltd (HK:2600) (Chinalco).
In the process, Chinalco will become the world’s biggest aluminum company by production, leap-frogging from third place over the US’s Alcoa, Inc. (NYSE:AA) and Russia’s UC RUSAL PLC (MCX:RUALR) to take the number one spot. According to the FT, Chinalco will add 2.7 million metric tons of annual smelting capacity to its present 3.8 million metric tons when it inherits SPIC’s smelters, easily pushing it ahead of Rusal and Alcoa.
The Aluminum Giant
For state-sponsored and directed SPIC, the move makes good sense. The aluminum smelters were reported to be mostly loss-making and the group only owned them following the merger last year of smaller power generation companies and China Power Investments, a generator that had seen the close tie up between power generation and smelting as a good enough reason to get itself into the aluminum business.
Along with most of Chinalco’s assets, these smelters drew their power from the national grid which, in their heyday, allowed the state to subsidize power prices… even after recent price concessions. Many of these older smelters are now paying much more than the new generation of smelters built in the Northwest province of Xinjiang on low-cost thermal coal deposits and, hence, low cost local power supply.
Most, if not all, of Chinalco’s aluminum smelters are now metaphorically under water and adding more to the mix will drag the firm down even further. To what extent Chinalco has agreed to compensation from Beijing to help cover the costs of closing these loss-making plants remains to be seen.
If the rate of closures within the company picks up sharply, it will suggest the authorities accept it is a bad deal for the company and they need help sorting them out. With overcapacity likely to be an ongoing problem in China, the problem isn’t going to be resolved without closures.
Deal Unloads Debt
For SPIC, the transfer will free the debt-laden firm to concentrate its capital and borrowings on meeting the governments targets for more nuclear power plants. China has 28 nuclear power plants under construction and plans to build dozens more at an estimated cost of $150 billion, the FT reports. This is stretching the financing ability of its two largest nuclear companies, China National Nuclear Power Co Ltd (SS:601985) (CNNC) and China General Nuclear Power Corp. (CGN). Opening the sector to other players should help finance the nuclear build-out, the paper suggests.
by Stuart Burns