Aluminium Prices are on the Rise

Aluminum prices are on the rise as the government moves to reduce overcapacity in the sector and conserve energy in the midst of several cold spells hitting China this year.

With a quarter of the nation's aluminum production coming from Henan province, output slowed after December's bout of cold weather created electricity shortages.

By order of the government, producers were forced to reduce capacity to save electricity desperately needed to heat homes.

As a result of power rationing, the nation's largest aluminum producer - the Aluminum Corporation of China (Chinalco) - was forced to shut down two production lines at its Henan subsidiary earlier this month.

While producers would like to capitalize on the rise in prices, they don't have the electricity to do so. "The price of aluminum is attractive but we cann't increase output. In fact, we are on the verge of our power being cut," said a source at Hengkang Aluminum Co Ltd, who requested anonymity.

Aluminum prices have jumped more than 10 percent since December's record snowfall, with aluminum futures closing at 17,410 yuan ($2,550.06) per ton yesterday on the Shanghai Futures Exchange.

Producers are not alone in feeling the heat from price increases. Surging prices may drive aluminum fabricators to the futures market to hedge their risks.

Yuanda International Aluminum Group, the biggest aluminum curtain-wall maker in China, is eyeing aluminum futures.

Wang Yijun, president of Yuanda, said rising aluminum price have pushed up costs and undermined the company's competitiveness. "We are studying the feasibility of using financial derivatives to hedge risks," he said.

"Of course cold weather is a factor impacting prices, but there may be market speculation going on as well," said Wang. "It may be a seasonal fluctuation, and we expect prices will likely return to normal."

But analysts disagreed, saying speculation will only jack up prices further.

"Aluminum prices will continue to rise for two or three years with a long period of fluctuation as excessive liquidity and a weaker dollar heat up commodity market investments," said Li Huazheng, an analyst at Shanghai Securities.

"Aluminum producers should carefully manage their positions according to demand for the raw material, " he said.

China is the world's biggest aluminum producer, and the government is well aware of the vast amount of energy required for aluminum production. Therefore, officials have ordered producers to reduce overcapacity and conserve energy.

Just last month, Li Yizhong, minister of industry and information technology, vowed to put aluminum capacity issues at the top of his agenda. The ministry also urged producers to speed up their merger and acquisition efforts to upgrade the industry as a whole.