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UPDATE 2-Beijing considers bailout for stricken aluminium industry -sources

* China could buy more than 1 mln T of aluminium -sources

* Wants to support its struggling metals industry

* Discussions have centred on tonnage, pricing -sources

* Could be followed by more buying next year -source (Adds detail, background)

By Polly Yam

HONG KONG, Nov 27 (Reuters) - China’s state stockpiler is considering buying more than 1 million tonnes of aluminium from local smelters, sources said on Friday, an initial sign that Beijing could agree to the first major bailout in its embattled metals industry since 2009.

News that the central government might scoop up a sizeable portion of domestic inventory in a bid to shore up struggling smelters stunned some traders, who said the strategy to increase state reserves would offer only short-term support to prices as the demand would be artificial.

Shifting metal into storage would do little to get rid of the structural overcapacity that has pushed international prices to decade lows and helped create global oversupply, the traders said. Estimates on the world glut range between 8 million and 12 million tonnes.

The potential purchase, worth over $1.5 billion at current prices, would be part of a broader plea for help by aluminium, zinc and nickel producers and state-controlled metals industry body, China Nonferrous Metals Industry Association (CNIA), earlier this week. It equates to about 40 percent of China’s output in October.

The State Reserves Bureau (SRB) did not immediately respond to a request for comment.

The discussions centred on tonnage and pricing, two Chinese industry sources familiar with the possible move said on Friday.

“The amount would be bigger than the market has estimated,” said an industry official who has direct knowledge of the discussions, adding that the volume could be about 1.5 million tonnes. Some market participants had expected an amount around 900,000 tonnes.

The official said the government wants to ensure the deal provides cash to help operating smelters stay open, while also making sure the offer doesn’t prompt smelters to reopen idled capacity.

One option was to pay prices based on state-owned smelters’ cash production costs, an executive at a medium-sized smelter said, adding that the state stockpiler would most likely buy the metal from state-owned firms.

Prices on the Shanghai Futures Exchange have surged over 5 percent this week in their best weekly performance in almost a decade amid hopes that state-buying would remove excess inventory from the market.

While the move in percentage terms was big, prices were recovering from their weakest in a decade hit earlier this week and are still close to or below the cost of production for many smelters.

The second source said the state could buy more next year after an initial purchase. Both sources declined to be identified due to the sensitivity of the matter.

China’s state stockpiler has in recent years bought thousands of tonnes of surplus aluminium, zinc and nickel to support prices, but this deal would mark the first major government move to shore up the metals industry since 2009.

Six years ago, SRB went on an aggressive buying spree in copper, lifting the market out of one of its worst-ever slumps.

It is not clear whether the SRB is considering throwing a similar lifeline to the zinc and nickel sectors.

Aluminium smelters have shut about 3.5 million tonnes of annual capacity so far this year, a CNIA report released on Friday said. Idle capacity could reach 5 million tonnes by the end of this year, it said.

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