LONDON, Oct 28 (Reuters) - The latest global aluminium production figures released by the International Aluminium Institute (IAI) show the world's producers are in a race against time to realign output with fast-declining demand. Failure will leave the market weighed down by the largest stocks overhang in living memory.

CHINA
China will hold the overall key to how the market's dynamics play out over the coming months. Not only is China the world's largest producer of the light metal, it has also been registering the fastest production growth for several years. Critically, much of the country's smelter sector lies at the higher end of the cost curve, leaving it particularly vulnerable to free-falling prices.

National aluminium champion Chalco has announced the largest cutbacks of any producer so far in response to slumping prices.

It said last week it intends to reduce output by an annualised 720,000 tonnes by mothballing older, higher-cost capacity. Frustratingly, the company gave no further details, such as a timeframe or the likely duration of any cutbacks.

A host of smaller producers are expected to follow Chalco's lead and some have already started curtailing output.

Evidently, the market hasn't been impressed since aluminium prices have continued to fall. Three-month metal closed Monday valued at $2,038 per tonne, down by 15.4 percent on the start of the year and a long way off the July highs of $3,375.

There are two reasons for the lack of price reaction.

Firstly, the absence of concrete detail about these cutbacks is reason for market skepticism, particularly given the long history of Chinese cutback announcements, which have failed to translate into any sustained fall in national production.

Tangible evidence of cutbacks will only come from the monthly production figures provided by the China Nonferrous Metals Industry Association (CNMIA) and carried on the IAI's website.

Herein lies the second issue. The most recent figures for September showed Chinese production growth re-accelerating.

Daily production in China dipped sharply in the first quarter of the year to an average 34,160 tonnes from 37,000 tonnes in December 2007. The fall was a result of well-documented power problems caused by severe winter weather in the first couple of months of 2008.

Daily production resumed its uptrend in the second quarter of 2008, peaking at 39,070 tonnes in June. It then fell back again in July in response to new power availability constraints during the summer peak in electricity demand. Since then, though, the country's aluminium output has been rising again, hitting 38,390 tonnes per day in August and 38,530 tonnes in September, according to the CNMIA figures.

Before the aluminium price collapse, the market had been braced for a new spurt in Chinese production growth as cooler temperatures fed better power availability and another wave of new capacity was brought on stream. That's the headwind against which Chinese production cuts are going to be taking place and the jury is still out on what the net impact will be.

REST OF THE WORLD
Production elsewhere in the world peaked at 70,600 tonnes per day in April and May. Since then, it has been easing, albeit very gradually.

Daily output averaged 70,100 tonnes in September, which was unchanged from August, according to the IAI figures. U.S. producer Alcoa has announced the only significant curtailment of capacity so far outside of China. Production at the 270,000-tonne-per-year Rockdale smelter in Texas will be phased out over the remainder of the year.

However, as with China, this action will do little more than offset previously planned production growth. Alcoa has been ramping up its new 320,000-tonne per year Fjardaal smelter in Iceland this year, which is why Western European production was up by 9.2 percent in the first nine months of 2008.

Daily average production in Eastern Europe, meanwhile, hit a fresh all-time high of 12,770 tonnes in September, which is largely a result of UC RUSAL ramping up both its new 300,000-tonne-per-year Khakaz plant and the 170,000-tonne-per-year expansion of its Irkutsk smelter.

Such new capacity was intended to meet forecast above-trend demand growth in the coming years. Producers are still full of optimism about the light metal's long-term demand prospects. The short term is the problem, as credit crisis feeds through to real economy crisis. A key transmission mechanism is the automotive sector, which also happens to be a major end-use sector for aluminium.

Stocks are rising fast. Those registered with the LME surged by 226,150 tonnes in September and have risen another 128,975 tonnes in October to date. Shanghai inventories are just off multi-year highs above 200,000 tonnes.

"We are reviewing each and every potline across our entire global smelting system," Alcoa Chief Executive Klaus Kleinfeld said last week.

Every other producer will be doing the same, but time is not on their side.