Chinalco closes gap on top aluminium producer Hongqiao via Yunnan deal

China's state-owned Chinalco is set to close the gap on privately run China Hongqiao Group , the world's top aluminium producer, after sealing a deal with the Yunnan government that gives it access to more smelting capacity.

Yunnan Metallurgical Group, which controls Yunnan Aluminium Co Ltd, will be merged into China Copper Co, a joint venture between Chinalco and the Yunnan provincial government, according to a Yunnan Aluminium statement on Monday.

The joint venture is owned 58 percent by Chinalco, officially the Aluminum Corp of China, and 42 percent by the Yunnan government, said the statement, which was issued after the signing of an "in-principle" agreement in Kunming on Sunday.

The move is the latest sign that Chinese aluminium producers want greater exposure to Yunnan, where hydropower is abundant, as the government cracks down on coal-fired power.

"I wouldn't say it was cheaper, but it's more environmentally friendly (and) … better for future development," said Jackie Wang, an aluminium analyst at CRU in Beijing.

The deal will give Chinalco access to Yunnan Aluminum's 1.6 million tonnes of smelting capacity, with another 1.45 million tonnes in the pipeline or under construction, Wang said.

Chinalco's listed unit, known as Chalco , had smelting capacity of 3.93 million tonnes per year at the end of 2017, according to its annual report.

China Hongqiao had 6.46 million tonnes a year of capacity at the end of 2017, according to a recent filing.

While Chalco may actually have something less than the 3.93 million tonnes figure, combined with Yunnan Aluminium, it will be challenging Hongqiao's volumes, said Paul Adkins, managing director of consultancy AZ China.

"Yes, they will have as much as Hongqiao operating, though don't forget Hongqiao has 2.6 million tonnes idle," he said.

"Chalco has idle assets too, but none that could come back and be profitable," Adkins said.

Chinalco did not answer a question concerning its current capacity or its capacity after the deal.

A statement on Chalco's website valued the strategic cooperation at over 100 billion yuan ($15.6 billion).

The deal will also give Chinalco its first lead and zinc assets as Yunnan Metallurgical Group also controls Yunnan Chihong Zinc & Germanium Co, which announced the agreement in its own statement on Monday.

($1 = 6.3951 Chinese yuan) (Reporting by Josephine Mason and Tom Daly; Editing by Richard Pullin and Tom Hogue)