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Chinese Profits: Bad for Metal prices?

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Message James Stafford

Metals investors globally were cheered this week by good news from Aluminum Corp. of China (A.K.A. Chalco).

The aluminum giant swung back into profitability for the first time in a year during the first quarter. Chalco enjoyed net income of 627 million yuan ($92 million) for the past quarter, as compared with a loss of 1.9 billion yuan ($280 million) in Q1 2009.

Good times appear to be back for the company. Chalco's plants ran at more than 90% of capacity in Q1, buoyed by rising aluminum prices in Shanghai (and around the world).

This is exactly what the Chinese government wants to see.

In the wake of the financial crisis, one of the biggest stories for the metals was buying of copper, aluminum and iron ore by state-run Chinese firms. At the time, this buying spree was attributed to China's "insatiable thirst" for metals, needed to fuel rampant infrastructure development in the country.

But reading between the lines, there appeared to be a different explanation for the buying.

In several speeches early in 2009, Chinese government officials talked about the importance of raising domestic metals prices. The reason? Staving off unemployment.

Many of the large Chinese metals producers run at very high operating costs. In fact, just this week Citigroup commented that Chalco's attempts at cost reduction over the past year have been largely ineffective, and that the company "could face more pressure with higher coal prices and potential power tariff adjustments."

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I have an interest in the financial markets, commodities and Geopolitics.
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