When Aluminum Corp of China (Chinalco) paid $14 billion for 9% of Rio Tinto in February 2008 it was seen as a strategy to prevent a takeover by Rio’s great rival BHP Billiton. Any merger between the two leading iron ore firms was regarded as bad news for China, the world’s biggest metals consumer.
A year after the deal, Chinalco’s chairman Xiao Yaqing was appointed deputy secretary general to the State Council, rekindling his political career at the heart of government.
But Xiao’s successor Xiong Weiping was left with a more thankless task. Chinalco had invested too heavily in global diversification when it would have done better to consolidate at home. It succumbed to years of consecutive losses and its listed unit Chalco has lost 83% of its market value over the last five years.
Since the beginning of the year Xiong has been doing the rounds with the Chinese media. The message he wants to hammer home is that Chinalco’s fortunes are turning around.
“Wearing the hat as one of the top 10 loss-making SOEs has been too heavy on my head,” Xiong told China Business News. “But the pressure has been so big that I have not had the time to feel depressed.”
Chalco reported net losses of Rmb8.2 billion ($1.5 billion) in 2012, ranking it the second largest loss-maker among state firms, trailing only the shipping giant COSCO. For the first three quarters of 2013, it stayed Rmb1.8 billion in the red. But thanks to a flurry of asset sales to Chinalco, its unlisted parent, Chalco has managed to generate a series of one-off returns. In January it announced that it now expects to report about Rmb1 billion in profit in the full year performance for 2013.
“We want a complete turnaround by 2015,” Xiong told New Century magazine last month. In fact, Chinalco says that all of its business units are profitable, with the exception of the aluminium business that accounts for 46% of its Rmb50 billion in assets. The problem is that it is struggling to stop the bleeding in this core operation. Overcapacity continues to plague the industry. China has the capacity to make about 34 million tonnes of aluminium but only produced 24 million tonnes last year. Prices have dropped for four years in a row from Rmb16,000 a tonne in 2011 to Rmb13,700 today (industry breakeven is Rmb15,500, according to the company).
While some private sector producers have managed to stay in the black, Xiong admitted to the Economic Observer that Chinalco still lacks competitiveness. Its manpower-to-production ratio got as bad as 10 times that of some of its privately-held rivals. This led to a drastic round of cost cutting. In the last quarter of 2013 it pushed 19,000 of its 240,000 staff into “early retirement”. More jobs may go, with the central government pledging Rmb4 billion in subsidies for further layoffs. Reforms like these helped to reduce Chinalco’s loss by Rmb3 billion last year, Xiong says.
Chinalco has also allowed 17 of its regional subsidiaries to experiment with hiring executives through open competition and allowed some employees to hold company shares. Hardly revolutionary, it might seem. But Xiong wants the changes to be transformative. Chinalco says it is even considering bringing in private sector partners for some of its core aluminium businesses.
As the biggest consumer of electricity in China, Chinalco also says that its prospects hinge heavily on another overdue SOE reform: dismantling the monopoly of the state power grids. “Recently I’ve visited six state banks. All of them are making more than Rmb100 billion in profits,” Xiong told CBN. “Two monopolies must be broken up in the future. Banking is one. Power grids have to come second.”
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