Performance-driven works and more diversified productsWe visited Chalco Shandong （refinery）， Shandong Huayu （smelting and alloysmanufacturer） and Chinalco Ruimin （aluminium semis） last week. Judgingby our conversations with the local management, we feel they are quiteaware of their assigned targets. Managers and employees’ incomes are closelylinked to individual plants’ performance, which we believe makes Chalco morecompetitive. Besides, Chalco is also trying to diversify its products via increasingalumina chemicals （more end-user oriented） and high-end aluminium alloys ratherthan pure primary metal. We also like its environmental friendly plants, whichis a key focus nowadays. Despite near-term earnings pressure, we retain ourconstructive view on Chalco.
　　Chalco Shandong – skewed towards chemical aluminaChalco Shandong has capacity of 2.38mt alumina and 0.85mt chemical alumina.
　　Chemical alumina, unlike alumina, is widely used in daily chemicals, includinglaundry detergents, artificial boards, wire/cable, ceramics, paper and catalystcarriers, etc. The company now has 33% to 77% market share in differentsubsectors ， and it plans to invest RMB3bn capex tobuild high-end chemical alumina plants with a total new capacity of around 1.3mtin the longer run. Chalco is doing more alumina hydroxide and chemical alumina,together with some existing non-operating capacities; the company thus expectslimited impact during the heating season shutdown.
　　Shandong Huayu – focus on high-end aluminium semis and calcined cokeHuayu’s management targets 26kt high-end aluminium this year, representing15% of total volume vs. 5% last year and 0.3% the year before. Regardingper tonne profit, management is guiding RMB100-200/t for low-end alloys,RMB300-500/t for mid-end and RMB700/t+ for high-end ones. Huayu’s smeltingbusiness is barely at breakeven due to smaller power plants, but carbon anodesare making good profit of c.RMB800/t. A 600kt calcined coke plant will comeinto commission this Nov and the company planned a total capacity of 1.2mt,although Huayu’s CEO expects a mean reversion of RMB200-300/t in terms ofper tonne profit.
　　Chinalco Ruimin – a 800kt semis production baseRuimin targets 280kt, or a 12% yoy growth this year, with semis for 3C andpackaging being the largest components for now. In the longer run, Ruimin’s totalcapacity is expected to reach 800kt （c.40% of total Chinalco）， within which, autosheet accounts for 250kt, followed by 200-250kt for 3C and packaging, 150kt foranode plate （in air conditioner）， and 100kt for CTP. Ruimin’s CEO is optimisticabout vehicle volumes but a bit concerned about vehicle size, as the aluminiumauto body sheet consumed in a QQ can be only half of that in a typical Mercedes.
　　The outlook in 3C semis is a bit mixed, given the substitution from glass andceramics in cellphones, although metal might still be required to protect it fromcracks.