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Aluminium smelter restarts seen undermining global deficit outlook

* China firing up mothballed smelters after price rise

* Previous shutdowns contributed to forecasts for deficit

* Graphic on China output: http://link.reuters.com/ceh48t

By Eric Onstad

LONDON, Sept 25 (Reuters) - Higher aluminium prices have prompted some Chinese smelters to abandon production cutbacks and are seen leading to restarts of other plants, chipping away at what was expected to be the first global deficit after years of oversupply.

A rally in London Metal Exchange (LME) futures contracts this year plus record premiums, or charges to obtain physical material, have sharply improved the financial stance of many smelters that were in the red last year.

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"You've moved the profitability of the industry dramatically this year, from most of it losing money to almost all of it being cash-positive ... so the next risk is that you get restarts," Stephen Briggs, a metals strategist at BNP Paribas (Xetra: 887771 - news) in London, said

"Quite quickly you can get to a position where the deficit gets smaller."

The benchmark aluminium price on the LME surged 27 percent in the seven months to the end of August to an 18-month peak. It has since given up some of those gains but is still up about 10 percent so far this year.

The rally was partly driven by speculators, who expected the market to swing into deficit this year after many years of overproduction and surpluses.

SMELTERS FIRING UP

The consensus median forecast of analysts polled by Reuters in July was for a surplus of 235,500 tonnes this year, moving to a deficit of 4,444 tonnes in 2015. A significant minority of analysts expected a deficit in both years.

Those deficit forecasts were partly based on moves by aluminium producers around the world in recent years to slash capacity by millions of tonnes, but analysts may have to rejig their estimates as some smelters start firing up again.

Chinese restarts are the main focus, since many high-cost smelters were hit hard by the price declines but have now moved into the black.

So far this year, some 1.3 million tonnes of annual capacity has gone back online in China, according to Richard Lu at consultancy AZ China in Beijing.

"We suppose there might be some small additional restarts in the northwest like Gansu Province ... and the (restarts) number for the full year will be about 1.6 million tonnes per annum," he said.

Chinese primary aluminium output rose 8.8 percent year-on-year to 2.027 million tonnes in August, the first time it has broken above the 2 million mark, Commerzbank (Xetra: CBK100 - news) said in a note.

Most of the Chinese restarts have been based on promised government subsidies, Lu added.

RUSAL QUESTION

So far, there have not been widespread moves to restart shut smelters outside of China, but continued firm prices and strong premiums could tempt some producers, analysts said.

Japanese aluminium premiums were set last week mostly at record highs of $420 a tonne, up 70 percent from a year ago, while European and U.S. premiums have been hovering at record levels.

The world's biggest aluminium producer, United Company Rusal (HKSE: 0486.HK - news) , said on Tuesday that about 40 percent of mothballed capacity could be restarted if prices were buoyant.

"I am tipping Rusal will bring a plant back soon, maybe even this year, but Alcoa (NYSE: AA - news) won't even think about it until the LME is at $2,700," Paul Adkins of AZ China said.

Despite possible restarts, Rusal forecasts a global market deficit of 1.2 million to 1.3 million tonnes next year, down from a deficit of 1.5 million this year, First Deputy Chief Executive Vladislav Soloviev said.

While closed smelters owned by Alcoa Inc would need an LME price of at least $2,500 a tonne to make restarting profitable, Rusal could do so at a lower price, AZ China's Adkins told the Reuters Global Base Metals Forum.

LME benchmark aluminium was trading at around $1,960 a tonne on Thursday morning. (Additionial reporting by Maha El Dahan in Abu Dhabi; Editing by Veronica Brown and Jane Baird)