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China will launch a national policy next month to reorganize its fragmented and loss-ridden aluminium sector, the largest in the world, an industry official said Wednesday.

The National Development and Reform Commission, the main industrial regulator, is finalizing the policy that will be released after the National Day holiday (from October 1-7), said Pan Jiazhu, vice-chairman of the China Non-ferrous Metal Industry Association.

"The policy will encourage domestic aluminium producers to form bigger groups through mergers and acquisitions," Pan told China Daily.

There are nearly 100 aluminium companies in China with a total production capacity of more than 9 million tons a year, according to statistics from the metal association.

Of those, only five have an annual output of more than 200,000 tons while 20 are only able to produce more than 100,000 tons of aluminium a year.

Zhu Yan, an analyst with Antaike Information Development Co Ltd, the Beijing-based metal industry consultancy, said, "Most aluminium producers in China are too small to have international competitiveness. We will see a lot of mergers and acquisitions in the sector in the short term."

Aluminium Corporation of China Ltd (Chalco), the nation's No 1 aluminium maker, will pursue acquisitions of domestic plants to expand its aluminium production capacity, the company said on its website (www.chalco.com.cn).

Chalco now has a total aluminium production capacity of more than 1 million tons annually through acquisitions in recent years.

Pan said the policy will also urge aluminium producers in China build plants in regions which are rich in electricity and alumina, the raw material used to make aluminium.

"The policy will enhance the sector's threshold to eliminate low-technology players and prevent over production," Pan said.

"We suggest that all new aluminium projects in China, no matter whether they are owned by domestic or foreign investors, should have an annual capacity of more than 100,000 tons and stable material and power supplies."

The policy will require capital investment in all new aluminium projects in China to account for at least 35 per cent of their total investment, he said.

The policy will curb China's aluminium exports and call on domestic producers to mainly target the home market, he said.

"Exports of aluminium mean exports of our power as the sector is highly power-consuming," he added.

China has been suffering power shortages since 2002 as a result of faster-than-expected growth in demand.

The nation has taken a slew of measures to control aluminium exports this year.

Last month, China banned the so-called tolling and processing trade of alumina, which allowed domestic producers to import alumina free of tariffs as long as they export aluminium.

In January, the nation abolished an 8 per cent tax rebate and resumed a 5 per cent tariff on exports of aluminium, as well as copper and nickel.

"With these measures, China's aluminium exports will surely decline next year, putting an end to the rapid growth of recent years," Zhu said.

Statistics show China exported 890,000 tons of aluminium in the first seven months of this year, up almost 20 per cent from a year earlier.

These measures will add pressures to most aluminium producers in China, which have been making losses since last year due largely to growing cost of alumina and electricity.

"The whole aluminium sector, excluding the alumina business, will be in the red this year," said Wang Huajun, another official from the metal association.

So far this year, over 65 per cent of all aluminium companies in China have made losses, Wang said.

More than 40 small aluminium plants in China have been shut down because of heavy losses since last year.

China's aluminium output will reach 7.5 million tons this year, up from 6.67 million tons in 2004, he said.

Prices of alumina in China have been on the bullish side in recent years, boosted by strong demand.

The prices hover at around 5,400 yuan (US$665.8) per ton, more than double compared with two years ago.