First Chinalco, now Chincoco?

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Aluminum Corporation of China (Chinalco), China’s leading aluminum producer has shifted its investment emphasis to copper according to reports in the Telegraph newspaper. The reason given for the move is copper holds greater development potential said company Vice-President Lu Youqing in an interview with Reuters.

Chinalco is no stranger to copper; the company owns 49% of the country’s fourth largest copper smelter Yunnan Copper via an unlisted subsidiary China Copper Company. Although there are currently no plans to float the subsidiary that is clearly an option down the line and we could see a Chincoco to match the current Chinalco. Chincoco was set up last year and already has assets worth more than 60bn Yuan ($8.8bn). Copper prices have surged by 130% since the start of 2009 against aluminum prices that have risen only 44%. The disparity in performance is largely down to supply and demand fundamentals. The copper market is running a small surplus, and the aluminum market is running a massive surplus – which has weighed on aluminum prices. The company already owns the $2.2 billion Toromocho copper mining project in Peru but has said they do not intend to build a smelter at the mine. Building work on the Toromocho project will start this year and the mine is expected to produce 210,000 tons of copper in concentrate annually from 2012 onwards. Chinalco has said the world’s copper smelters are already battling over capacity and so the company intends to bring the copper in concentrate from Peru to Yunnan’s facilities in China for refining.

Mr Lu was being typically cagey about Chinalco’s intentions, not discussing any details of potential targets in the copper market. But Ivanhoe Mines’ copper-gold project in Mongolia has been mooted as a potential target. The Chinese are well placed geographically and historically to make the most of Mongolian projects so Oyu Tolgoi would be an obvious target. Yunnan Copper recently signed a deal to take over a smelter in Inner Mongolia called Chifeng Jinfeng Copper Co.

Chinalco also said yesterday that it had posted a profit in the second half of 2009, compared with a loss in the first half of 2009. No profit figure was revealed, but the company’s full-year sales rose 10% to 142bn Yuan ($21bn). In December, capacity utilization at its aluminum operations exceeded 90%, with production costs falling 17% over the year although no details of how that breaks down in alumina and power costs appear to be available. Nevertheless the company is unlikely to look at new smelter projects within China in the short term, the government has made it clear it does not want to encourage further high energy consuming aluminum smelters when the market is already over supplied and meeting rising power demands is challenging.

–Stuart Burns


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