China plans to shake up the aluminum industry

China is pushing two of its largest aluminum smelters to merge as it restructures its public sector to create the world's largest aluminum producer.

State Power Investment Corp (SPI) is in talks to divest its aluminum assets and merge with Aluminum Corp of China (Chinalco), allowing SPI to focus on the energy sector. Consolidation is one of Beijing's ambitious moves to restructure its huge but dysfunctional public sector, especially during a slowdown in economic growth.

If successful, it will provide an impetus for reform, but the process is slow as Chinalco is unwilling to take over the high-cost SPI smelter. SPI inherited unprofitable aluminum assets when it was created through the merger of two state-owned enterprises and wants to move away from a sector that suffers from overcapacity. The transfer of assets will increase Chinalco's throughput to over 7 million tonnes of primary metal per year, making it the world's largest producer, ahead of Russia's Rusal.

China in late 2013 pledged to restructure its huge, debt-ridden public sector. Profits of state-owned enterprises fell 4.5 percent in the first seven months of this year from the same period a year earlier, according to the Finance Ministry. The move is expected to reduce the total number of central government SOEs from 111 to 40, merging identical business structures. Nevertheless, the beginning of reforms was repeatedly postponed, it was necessary to balance and coordinate "conflicts" between government departments and enterprises.

Among the candidates for mergers, the two largest coal companies may also be included in this number, the large steel-making enterprises Baosteel and Wuhan. Also on the agenda are China National Nuclear Corporation (CNNC) and China General Nuclear Power Corp, Chinalco and SPI, among others. However, a senior Baosteel official warned of the risks of creating "huge monsters" in the sector, saying the mergers would only work if they were accompanied by capacity cuts.