An employee operates a container as molten aluminum is poured at the China Hongqiao Group Ltd. aluminum smelting facility in Zouping, China, on Monday, Nov. 4, 2013. China Hongqiao Group is China's largest private aluminum maker. Photographer: Brent Lewin/Bloomberg
© Bloomberg

The world’s largest aluminium producer expects to increase its capacity this year, in spite of a global glut that has depressed utilisation rates and weighed on prices for the lightweight metal.

China Hongqiao, the world’s largest aluminium producer by capacity, on Monday said it planned to increase capacity to 6m tonnes by the end of 2016 from 5.19m tonnes at the end of last year, depending on market conditions.

Zhang Bo, chief executive, said: “If demand is good, we will stick with the plan. If not, we can slow down new capacity expansion or even suspend it.”

The group added it would spend up to Rmb15bn ($2.3bn) in expanding capacity and retrofitting coal-fired power plants to meet China’s stricter emissions requirements.

Better known in the industry as Shandong Weiqiao Aluminium & Electricity, Hongqiao reported 2015 sales up 39 per cent year on year to 4.12m tonnes, in spite of production cuts at the end of the year as aluminium margins deteriorated.

Fuelled by cheap power and the need to keep producing in order to repay loans, Chinese aluminium smelters have flooded international markets, forcing western producers to cut output and leading to dumping allegations in the US.

China now accounts for more than half of the world’s aluminium production and its debt-laden smelters’ ability to continue producing is the main factor in when the global supply glut will tighten.

The lightweight metal is trading at $1,550 per tonne, having recovered slightly from a seven-year low late last year.

Hongqiao is one of several Chinese smelters that have set up a company to buy excess inventory, which has helped bolster prices but done little to solve the underlying fundamental oversupply in the industry.

Chinese exporters, led by aluminium extrusion producer Zhongwang, have also attracted short-sellers suspicious of their reported margins. Hongqiao’s reported margin fell from 26 per cent in 2014 to 20 per cent last year, and Mr Zhang said he expected margins to stay stable this year.

Hong Kong-listed Hongqiao reported a 31 per cent drop in net profit to Rmb3.65bn, in spite of a 22 per cent rise in revenues. Gross current liabilities soared from Rmb28bn to Rmb42bn, and the group booked Rmb1bn in foreign exchange losses due to the impact of a weaker renminbi on its foreign currency debt.

Private aluminium groups such as Hongqiao have benefited by buying electricity from generators they control, or sourcing cheap power from hydropower dams and coal-fired plants constructed during China’s infrastructure binge of the past decade. Many of Hongqiao’s customers are clustered around its Shandong smelter, allowing production efficiencies when they buy its molten aluminium.

“Hongqiao has captive power, they don’t have the employment legacies like [state-owned] Chalco and they are a little more innovative in terms of their shipping of molten metal,” said Michael Komesaroff, industry analyst at Urandaline Investments.

Smelters including Hongqiao have been forced to build expensive alumina refineries in Indonesia after that country outlawed shipments of bauxite ore in an effort to attract industrial investment.

Mr Zhang said the company planned to prioritise shipments from a new bauxite mine in Guinea this year. Hongqiao’s projected imports account for about one-quarter of China’s total bauxite imports.

China Hongqiao shares — which were trading above HK$8 in mid-2015 — closed up 0.4 per cent at HK$4.90 on Monday.

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