Chinalco Slashed Payroll by 30%to Fight the Industrial Chain Crisis

The aluminum industry once again slipped into the red. Compared with the dilemma it faced during the international financial crisis in 2008,the current difficulties that the aluminum industry faces have characteristics that are more similar to that in repeating the same mistake of the steel industry in terms of supply of raw materials.

Jia Mingxing, Vice President and Secretary General of China Nonferrous Metals Industry Association, told the reporter that China’s production cost of electrolytic aluminum is higher than market price due to the rising cost of raw materials and energy, and enterprises are miring down in operating losses.

Although Chinalco, China’s largest aluminum enterprise, has not released its underproduction plan, not long ago, Chinalco predicted in its Financial Report 2011 that it would continue to see losses in Q1 2012. Following the pay cut in 2008, Chinalco once again slashed the pay by 30%. According to Chinalco Annual Report 2011, Chinalco’s salaries payable stood at approximately RMB 0.466 billion, down approximately 30% compared with RMB 0.636 billion of 2010. Although no mandatory job-cut policy was adopted, compared with that of 2010, Chinalco’ current headcount was reduced by 6997 to 101,259. Employees who were laid off are mostly workers, and the number of laidoff managers was 1400.

Chinalco told the reporter that the downsizing is the result of its implementation of institutional reform, i.e., some branches and subsidiaries under Chinalco carried out internal retirement plan, which allows eligible employees to retire voluntarily.

Losses of the aluminum industry tend to result directly in pay cut and job cut of Chinalco. In 2011, Chinalco’s net profit attributable to shareholders of the parent company stood at RMB 0.238 billion, a sharp decline compared with RMB 0.778 billion in the same period of the previous year. In addition, Chinalco’s selling cost, selling expenses and management cost increased in varying degrees, of which the financial expenses increased by RMB 0.846 billion, up 33.36% y-on-y.

Chinalco explained that its net profit slump was mainly caused by China’s interest rate hike cycle and increased interest-bearing debt of Chinalco that result in financial expense increase,as well as price increase of raw materials and fuels that results in decline of sales gross margin of Chinalco’s leading products.

Chinalco attributes its performance decline to climbing electric power cost and declining aluminum price. Now, aluminum price has dropped even below RMB 16,000/ton, less than the cost.

Electricity price increase is a cost constraint that is hard to get rid of for China’s electrolytic aluminum industry. Currently, in terms of the proportion of electricity price to electrolytic aluminum cost, domestic enterprises account for 45-50%, while foreign enterprises merely account for 25%-30%, which makes the cost of China’s electrolytic aluminum much higher than that of foreign countries. As a result, the global competitiveness of China’s electrolytic aluminum industry has dropped sharply.

Under such a background, industrial chain integration starts to heat up in China’s aluminum industry. Currently, China’s aluminum enterprises are gearing up to explore the production modes of integration between upstream energy and downstream production, of which coalfired aluminum integration and hydraulic aluminum integration are generally adopted.

According to Xiong Weiping, President of Chinalco, the aluminum industry is likely to experience a 3-5 year downturn; nevertheless,Chinalco’s electrolytic aluminum business will remain competitive provided that the complete industrial chain consisting of coal-fired aluminum and hydraulic aluminum is formed.

Currently, all competitive Chinese aluminum enterprises have started to deploy industrial chain integration. According to an industry insider, Chinalco is speeding up negotiations about coal-fired aluminum integration in western regions such as Inner Mongolia, Gansu,Xinjiang and Ningxia this year.

In mid-March, Chinalco, together with Jiaozuo Wanfang Aluminum Manufacturing Co., Ltd.,made additional investment of RMB 2.848 billion in the coal-fired aluminum integration project in Shanshan, Xinjiang. In this capitalincrease project, Jiaozuo Wanfang invested RMB 1.014 billion and held 35% stock equities of Xinjiang Aluminum and Electric Power;Chinalco invested RMB 1.834 billion and held 65% stock equities of Xinjiang Aluminum and Electric Power.

Chinalco is also reorganizing Ningxia Power Generation Group. After the reorganization,Chinalco will take over projects concerning coal, electric power, new energy, new materials and equipment manufacturing, etc, which are currently in the charge of Ningxia Power Generation Group, and develop coal-fired aluminum integration projects.

Besides Chinalco, other competitive aluminum enterprises including Yunan Aluminum Co.,Ltd., Nanshan Aluminum and CPI are also speeding up to deploy coal-fired aluminum or hydraulic aluminum integration.

It is reported that Chinalco boasts more than 90% bauxite resources of China. However,Chinalco’s alumina production capacity currently only accounts for 30% of total alumina production capacity of China, which means that raw materials needed by the remaining nearly 70% of alumina production capacity are mostly imported.

However, Chinalco’s bauxite output growth underperforms that of alumina. According to statistics of Chinalco, in 2011, Chinalco’s own mines yielded 13,560,000 tons of bauxite, up 6.5% y-o-y, while output of alumina grew by 8.7% y-o-y.

Wen Xianjun, Vice President of China Nonferrous Metals Industry Association, told the reporter, “At present, nonferrous metals companies are more concerned about cost increase of aluminum. But in my opinion, we shall also keep a watchful eye on the supply of aluminum raw materials and take precautions, so as to pay more attention to upstream supplies of raw materials.”

According to the responsible person of Chinalco Shanxi Aluminum, currently, China’s 60% bauxites are imported and the figure keeps rising. Plus the fact of single channel of import,bauxite is likely to suffer the same fate of iron ore.

According to Customs Statistics, in February 2012, China imported 4,665,900 tons of bauxite, up 112.26% y-o-y; in January and February 2012, China imported 7,781,600 tons of bauxite, up 51.8% y-o-y. China imports bauxite mainly from Indonesia and Australia. In February, China imported 3,807,600 tons of bauxite from Indonesia, up 160.92% y-o-y, and imported 809,600 tons of bauxite from Australia,up 41.04% y-o-y.

There is basically no hope for China to reduce dependence on bauxite import. According to“China Mineral Resources Report 2011 of MLR”, in 2010, China’s proved reserves of bauxite stood at 3.75 billion tons, which can be used up statically in merely a decade.

However, Wen considers that bauxite is not likely to repeat the fate of the iron ore since it is easy for the aluminum industry to recycle natural resources, such as speeding up industrialization of the technology extracting alumina by means of coal ash and researches on industrialization of the technology extracting alumina by means of nepheline, etc.