LONDON (Reuters) - Top aluminum producer China’s battle against pollution has raised the prospect of output cuts, causing prices to rise to 20-month highs, but the rally might have gone too far as oversupply remains a problem.

An employee checks aluminium ingots for export at the Qingdao Port, Shandong province March 14, 2010. REUTERS/Stringer/File Photo

The market excitement was sparked by a Chinese government document proposing that about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi should be shut over the winter months.

That would aid Beijing’s war on noxious smog, partly created by firms burning thermal coal to produce electricity, which in China could account for between 25 and 40 percent of the costs of producing aluminum.

“When the government in the past tried to implement measures to control production it wasn’t very successful,” said Edgardo Gelsomino a research director at consultants Wood Mackenzie.

“The only time production cuts really happened in China was when the economics of the smelters didn’t work.”

An example of this came in November 2015 when prices crashed to 6-1/2 year lows below $1,440 a ton and Chinese smelters cut about 3.6 million tonnes of capacity, according to analysts.

Prices have since recovered to around $1,800, significantly above the average forecast of $1,685 this year in a recent Reuters survey, which also shows a market surplus around 300,000 tonnes this year and next.

If implemented, the proposed new cuts might amount to between 3 million and 4 million tonnes out of an annual 40 million tonnes of capacity in China, while production last year amounted to 31.6 million tonnes, according to the International Aluminium Institute.

However, the draft specifies “the next heating period”, meaning the four months from November. If ratified it would amount to a fraction of global demand, estimated at around 60 million tonnes this year.

Total global inventories estimated at more than 10 million tonnes would cover the shortfall, which is unlikely as analysts expect new energy efficient capacity of about 2 million tonnes to come into operation this year in China.

“There is a lot of energy efficient capacity coming on anyway, so there can be capacity cuts and production growth,” Citi analyst David Wilson said. “This was being talked about last year; they will close the dirty capacity.”

Late last month China passed a law that will allow it to impose environmental protection taxes from 2018, following an outbreak of hazardous smog in the north where many steel mills, power generators and chemical producers are located.

As a rule firms that are targeted to tackle pollution are given time to comply before they are closed down, Wood Mackenzie analysts said. “As such we do not expect widespread closures of aluminum assets.”

Also, no decisions are expected to be made before the plenum or annual meeting of the highest ranking members of the Communist Party in October, which this year is expected to approve who will govern China for the next five years.

“The Communist Party won’t want any disruption, any impact on the economy ahead of the plenum,” aluminum expert Paul Adkins of consultancy AZ-China said.