Aluminum companies consider consolidation under SOE reform program

China is trying to push its two biggest aluminum businesses together as part of a planned shake-up of State-owned enterprises, industry sources said, a move that would create the world's largest aluminum maker.

Power company State Power Investment Corp is in talks to hive off its aluminum assets to Aluminum Corp of China Ltd, also known as Chinalco, allowing SPI to focus on power construction and generation, three industry sources said.

The consolidation is shaping up as a test of Beijing's ambitions to restructure its vast but underperforming State-owned sector, particularly at a time of slowing economic growth.

If successful it would be a fillip for reform, but slow progress in what is seen as a relatively simple tie-up underscores the problems China faces in more challenging SOE consolidation, such as merging rivals in the same industry.

"Merging State-owned enterprises is going to be very difficult and will involve a lot of problems that could cause damage to the harmony of society," said Guo Chunqiao, a macroeconomic analyst at the State-backed research firm Beijing Antaike Information Development Co Ltd, referring to potential job losses.

SPI, which inherited the loss-making aluminum assets when it was formed from the merger of two SOEs in June, wants to abandon the sector, which is suffering from a supply glut, the sources said.

Shifting the assets would boost Chinalco's capacity to more than 7 million metric tons a year of primary metal, making it the world's biggest producer, ahead of Russia's Rusal.

But while talks have been going on for the past two months, progress has been slow, with one stumbling block being Chinalco's reluctance to take over high-cost smelters, said a source familiar with SPI.

The State-owned Assets Supervision and Administration Commission, which manages SOEs on behalf of the central government, was considering the issue and would back the move if it did not dent Chinalco's profits, the sources said.