The profit-oriented market economy is seen working against Beijing's plan to reduce aluminum capacity in China.

Three years ago, Beijing introduced curbs on the aluminum industry, but production capacity since then has risen more than 60 percent and is still expanding.

No matter what the curbs are, it is the market economy that is really working, said Heng Kun, an analyst at Everbright Securities.

Beijing has imposed measures, including tighter credits, higher electricity fees, to cool investment in the power-hungry industry since 2003 as the country suffered energy shortages.

Since then, aluminum production has been blamed on eating up tonnes of local resources, such as coal, and also becoming a major source of pollution.

Annual capacity has risen to 13 million tonnes, which is 36 percent of the world's aluminum smelting capacity. And China is now alone capable to cover world consumption for 136 days.

Some new projects were approved by Beijing before the curbs and they have come on stream over the past two years.

Despite the curbs, local authorities have quietly allowed investors and smelters to build and expand aluminum capacity under their administration to boost the local economy.

As the curbs continue, it is difficult to find out the location of the new smelters, said Wang Feihong, analyst at state-owned research group, Antaike.

Local governments' attitudes are critical. I cannot imagine if new capacity was not supported by local governments, he said.

All new smelters are theoretically required to be approved by the National Development and Reform Commission. But the state planner does not have the capability to access every project.

Meanwhile, existing smelters have also expanded capacity but claimed they were only upgrading, industry officials said.

Loss-making smelters had slowed expansions last year but have started speeding up over the past few months. And this is not surprising as Chinese aluminum prices are now about $200 a tonne higher than production costs for smelters.

Smelters now are seeing the situation that material prices are falling while metal prices are stable. This is stimulating them to invest in new capacity, Wang said, adding that the power supply situation had improved.


World prices of alumina, the raw material, have fallen more than 30 percent since May as China, the world's biggest buyer, is expected to produce as much as 14 million tonnes this year, up more than 60 percent from last year.

World aluminum prices hit an all-time high of $3,310 a tonne in May and have risen 13 percent this year.

Smelters go for profits when they see such opportunity in the market, said an official at a large smelter in the south. The curbs are failing.

Rising profits were also prompting big aluminum producers to buy smaller rivals and revive their pending projects.

Aluminum Corp. of China Ltd., the country's largest alumina and aluminum producer, bought 140,000-tonne-a-year Fushun Aluminum Co. in March and will upgrade and expand its operations, according to an official at Fushun.

Shenhuo Group, which operates 200,000 tonnes of aluminum capacity in Henan province, will also revive the construction of a 300,000-tonne-a-year aluminum smelter after it bought a stake in the project.

Wang said the market expected some 5 million tonnes of new capacity could come up. But he added some of that planned capacity could be just ideas and would not turn into production.

But, even if only half of that expected capacity would come on stream in the next two years, it still would add 2.5 million tonnes to the country's capacity, giving another blow to Beijing's policy to cool the sector.

Facing another capacity boom, the state planner has repeatedly asked local officials to crack down on illegal construction of new smelters. It has also asked Chinese banks not to give loans to such projects.

Industry officials expect Beijing to double the tax on exports of primary aluminum to 10 percent later this year.

They believe Beijing has already decided to either cancel or reduce tax rebates on exports of most aluminum products in the hope to reduce outflows and production.