NEW YORK ( TheStreet) -- Aluminum overcapacity will evaporate in the coming three years, given the growing demand for the metal. This according to Xiong Weiping, chairman of Aluminum Corporation of China ( ACH).

⿿In the next three years, aluminum demand will increase as the economy grows and aluminum replaces other metals. I expect the 20-30% overcapacity to disappear,⿝ Xiong said. ⿿China will step up urbanization and will restructure the real estate market, in particular provide more government-subsidized apartments, which will boost aluminum demand.⿝

Chalco, as the Beiing-based company is known, is the worldâ¿¿s third-largest primary aluminum producer and second-largest alumina producer. On Aug. 24, it announced second-quarter results and an update on its outlook and future ventures.

Chalco reported 2010 first-half net profit of 531 million yuan as opposed to a loss of 3.52 billion yuan during the year-ago period. In addition, revenue for the period grew multi-fold to 59.78 billion yuan from 27.98 billion yuan earlier.

Recently, the company raised spot alumina prices by 4% as rising inflation drove the commodity prices up. The price of semi-finished alumina was increased to 2,750 yuan per metric tonne from 2,650 yuan per metric tonne earlier.

Diversifying from its major line of business, Chalco is planning to invest in coal and power producers. The company, which posted a 500 million yuan loss in June due to increasing power costs, is seeking to foray into coal, iron ore, and rare earths as higher fuel costs and aluminum overcapacity in China undermine profitsmargins. Looking ahead, the company plans to build its own coal production base and coal-fired or hydropower plants in order to produce aluminum.

A Goldman Sachs report said, ⿿With electricity cost accounting for roughly 35% of smelting cost, we believe the company would remain under margin pressure, unless there is a strong recovery in demand.⿝

Meanwhile, as China faces aluminum overcapacity situation, especially in a scenario wherein demand has eroded due to government-induced measures to curb property market growth, the company plans to close down 330,000 tons of outdated aluminum capacity by 2011. This represents almost one-third of the 1 million tons capacity that China wants to close in order to reduce metal pollution and energy usage. The company said that output in China is likely to surpass demand by 500,000 tons.

Chairman Xiong said that Southeast Asian countries are rich in bauxite, coal and hydropower resources, prompting Chalco to seek investment opportunities in these countries through strategic partnerships and stake purchases.

In February, Chalco agreed to develop and operate a $1 billion joint venture aluminum smelter in Malaysia to service a $2.4 billion hydroelectric dam which is nearing completion. The company believes that it is necessary to secure coal and hydropower resources to ensure cost competitiveness and protect against price fluctuations.

On a year-to-date comparison, Chalco has lost 27.4% while its competitors Alcoa ( AA) declined 37.6%, Kaiser Aluminum ( KALU) was down 13.7%, Century Aluminum ( CENX) slumped 40%, and Alumina ( AWC) shed 7.8%.
Karvy Global Services (www.karvyglobal.com), a subsidiary of the Karvy group (www.karvy.com), provides specialized research in asset classes including stocks, mutual funds and insurance to leading Wall Street firms.

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