China Hongqiao Group Ltd. announced that it would expand capacity to six million metric tons per annum, or sixteen percent, by the end of 2016, depending on market conditions. Chief executive officer Zhang Bo made the announcement at a press conference in Hong Kong on Monday, stating that, “If demand is good, we will stick with the plan. If not, we can slow down new capacity expansion or even suspend it.”
The firm, which surpassed UC Rusal for the title of world’s largest producer of aluminium, posted a 31% drop in net profit for the fiscal year of 2015 on Friday. Hongqiao increased output by 40% last year to leapfrog Rusal and become the world’s top supplier.
“There’s certainly a lot of supply around,” said senior vice president at Zaner Group LLC Peter Thomas, a Chicago-based metals broker. The China Hongqiao announcement “means prices are going down another 1 to 2 percent.”
“Ultimately Hongqiao is taking market share from other producers, as they are one of the lowest-cost producers in China and globally,” JPMorgan Chase & Co analyst Daniel Kang said by phone from Hong Kong. According to Kang, the closely held group has kept costs down by building its own power plants and developing its own raw materials supply chain.
“Aluminum consumption is quite strong and I think the market right now calls for more supply, not less,” Zhang said. He did not estimate how much the company is planning to produce in 2016.
Based on China’s east coast in Shandong province, Hongqiao has grown by leaps and bounds since it was first listed five years ago. The company’s nameplate capacity listed in its initial public offering paperwork was 1.1 million metric tons. The firm’s capacity at the present time is 5.2 million metric tons. According to Zhang, the firm is expanding capacity even while it cuts capital expenditures – the company spent US$17 million in capex in 2015, but projects only US$15 million of capital expenditures in the current year.
The decision comes as a surprising twist for the market, considering China’s recently announced supply side reform for the industry as well as environmental concerns over the CO2 emissions of some of the nation’s heavy industry polluters.