Small aluminium producers could face closure -China Hongqiao

* Some 30 pct of capacity may be forced to leave mkt in 3 yrs -China Hongqiao CEO

* Says about half smelters making losses due to low domestic prices

* But Hongqiao to increase aluminium, alumina output this year

* Says talking to Rio Tinto about bauxite supplies

By Polly Yam

HONG KONG, March 17 (Reuters) - Major aluminium producer China Hongqiao Group Limited 1378.HK expects its production to rise by about 20 percent this year even as overcapacity could force some smaller producers into bankruptcy.

Low domestic prices are cutting into cash at smaller firms, China Hongqiao Chief Executive Officer Zhang Bo said, adding that large smelters which own power plants were still making profits due to weak coal prices.

Electricity typically accounts for about 40 percent of aluminium production costs in China.

"In the coming three years, at least about 30 percent of capacity (will be forced to leave the market)," Zhang said at a media briefing in Hong Kong on Monday.

China currently has about 30 million tonnes of aluminium capacity of which 27 million tonnes is operating, Zhang continued.

He said that about half of the operational capacity was making losses due to low prices.

Beijing has for years tried to tackle the problem of overcapacity in aluminium and other industries, but the new government of President Xi Jinping has made it a priority.

Spot aluminium AL-A00-CCNMM traded below 13,000 yuan ($2,100) per tonne this month - its lowest since mid-2009. It has dropped about 30 percent from a record high in July 2011.

About half a million tonnes of capacity has already closed so far this year, with more expected to shut in coming months.

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LOANS CUT

Banks in China have also cut loans to industries suffering from overcapacity, hitting small smelters in particular, Zhang said.

China Hongqiao's aluminium capacity surged by 46 percent year-on-year to 2.96 million tonnes in 2013. That will boost the firm's aluminium production to about 2.9 million tonnes in 2014 from about 2.4 million tonnes last year, Zhang said.

The company is also planning to bring another 1 million tonnes of capacity online for producing alumina, which is used to make aluminium.

That would boost alumina output to near 4 million tonnes in 2014 from about 3 million tonnes last year.

Zhang said the firm was in talks with global miner Rio Tinto

to supply bauxite, the ore used for alumina production. He declined to give further details.

The firm is also building a $1 billion alumina project with 2 million tonnes of capacity in Indonesia. The first phase, with 1 million tonnes of capacity, will start production in October 2015. ($1 = 6.1502 Chinese Yuan)

((polly.yam@thomsonreuters.com)(+852 2843 6933)(Reuters Messaging: polly.yam.thomsonreuters.com@reuters.net))

Keywords: CHINA HONG/ALUMINIUM