China, which imports one-fifth of its aluminium annually, should not bridge the supply gap by expanding small-scaled production, said Zhao Jiasheng, office director of the China Nonferrous Metals Industry Association.

According to Zhao, the rapid increase of small-scaled production would dampen the market because imports, also of high quality, are hardly more expensive than domestic aluminium under the current border trade policies.

China cut the border tariff and value-added tax on aluminium by half last year.

Zhao said that due to local government schemes, the national production capacity is expected to bubble by more than 5 million tons by 2005, much more than the central government's planned total of 3.2 million tons.

He said China last year produced 500,000 tons of aluminium, a 17 percent rise from 1999. Another 550,000 tons will be added to the total this year. Most of what is made in the country has a low added value and is thus not very profitable.

The situation is getting more serious as more than 10 provinces and regions, such as the coal-rich provinces of Shanxi and Henan, are regarding nonferrous metal industries, including aluminium, as their pillar industries for the 10th Five-Year Plan period (2001-05).

Kang Yi, chairman of the association, attributed local governments' enthusiasm for expanding the production of aluminium to the roughly 10 percent price hike last year from the previous year.

Small coal fuelled power plants, which do not transmit their electricity to power grids due to their lack of competitiveness resulting from high production costs, often operate their own small aluminium plants.

Electricity costs make up over one-third of aluminium production costs.

"The government encourages aluminium plants to expand their production capacity to sharpen their competitive edge, but does not want new small plants to be launched,'' Zhao said.

Statistics indicate that the average annual production capacity for one plant in China is 24,000 tons, much less than the world's average of 200,000 tons.

Aluminium plants with an annual production capacity of less than 50,000 tons account for 89 percent of the national total.

Kang said the association is conducting researches and is calling for the government's attention.

Experts said, however, that the situation is hard to control because small-scaled plants, as the only type affordable to local governments and communities, are needed to make money for the local economy.

"But if over-production cannot be controlled, many enterprises will become bankrupt in three to five years, especially when foreign giants come in after China's entry into the World Trade Organization,'' said Guo Shengkun, general manager of the Aluminium Corporation of China.

Guo said if that occurs, the government would take the burden of the losses because these State plants are sponsored by loans from State banks.

(China Daily 04/09/2001)