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China's Biggest Aluminum Producer to Cut Outdated Capacity

China’s total smelting capacity last year was about 40 million tons.

China Hongqiao Group Ltd., the nation’s biggest aluminum smelter, is curtailing outdated capacity amid a broader crackdown by the government on illegal production. Shares of aluminum makers gained in China.

The company, the main aluminum arm of Shandong Weiqiao Pioneering Group Co., declined to give the scale or timing of the reduction in an emailed statement. Two people with knowledge of the situation said Weiqiao’s aluminum business started cutting 250,000 metric tons of annual capacity from Tuesday, declining to be identified as the information is private. A Weiqiao spokesman couldn’t be reached for comment.

China, the world’s top producer of the lightweight metal, has stepped up efforts this year to prune capacity to reduce excess supply. Its top economic planning agency issued an order in April for local governments to halt smelters that violate environmental guidelines, while a plan earlier in the year called for capacity to be shuttered during the peak pollution season over the winter. China’s total smelting capacity last year was about 40 million tons.

Hongqiao’s move shows its commitment to the government’s directive and gives the market confidence that China’s capacity curbs are actually happening, Liu Xiaolei, an analyst with SMM Information & Technology Co., said by phone from Shanghai.

SMM reported Monday that Xinjiang province, China’s second largest production hub after Shandong, is beginning environmental checks on smelters this week.

China’s commitment to cutting capacity is the big unknown in the aluminum market, the top executive at at Norsk Hydro ASA, Europe’s third largest producer, said in an interview last week. Aluminum on the London Metal Exchange has outperformed other metals this year on the prospect of Chinese cuts, advancing 12%. It rose 0.3% to $1,892 a ton on Wednesday.

Aluminum Corp. of China Ltd., the nation’s second largest smelter, advanced as much as 2.2% in Shanghai to the highest level in seven weeks. Yunnan Aluminum Co. surged as much as 4.4%.

“We estimate that 3.1 million tons, or 8% of total operating capacity, is without proper approvals, hence we expect more production cuts in the coming months,” Jack Shang, an analyst at Citigroup Global Markets Asia, said in an emailed note. “Winter production suspensions in North China should help further tighten the aluminum market in China.”

By Bloomberg News

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