China's State Reserve Bureau (SRB) will buy 300,000 tonnes of aluminum at 12,300 yuan (about 1,750 U.S. dollars) per tonne next month to push up prices and support producers, Friday's Shanghai Securities News reported.
The price represents a 10-percent premium on current market levels.
The SRB will buy about half of the total from Aluminum Corporation of China (Chalco), a listed arm of state-owned metals firm Chinalco. The rest will come from seven other smelters, sources told the newspaper.
Several sources said officials were still discussing further purchases, which could total 1 million tonnes.
The SRB maintains stockpiles of key raw materials.
This is the government's first move in the current market crisis to prop up the ailing nonferrous metals industry. Slumping prices and weak demand, due to the global economic crisis and China's own slowdown, have forced smelters to slow production and cut jobs.
On Wednesday, Zhang Ping, minister in charge of the National Development and Reform Commission (NDRC), delivered an economic report to the Standing Committee of the National People's Congress, the top legislature.
Zhang said that the central government will take immediate measures to support nine industries, including the nonferrous metals sector.
Governments at all levels immediately announced policies to aid the smelting sector, including relaxed export controls, stockpiling metals, offering electricity subsidies and raising loan ceilings.
The southwestern province of Yunnan said it would buy 1 million tonnes of nonferrous metals from local smelters and neighboring Sichuan Province said it would cut electricity prices for smelters.
IMMEDIATE IMPACT ON PRICE, CONFIDENCE
These measures have had an immediate impact on the market, with Shanghai aluminum futures up 0.5 percent to a three-week high.
Analysts said the metals industry in general is regaining confidence as a result of the purchase plan, as well as increased demand for steel by promoting infrastructure construction.
"Although the market trend won't soon reverse, these procurement plans do help companies tide over the crisis," said Heng Kun, an analyst at Essence Securities.
Company inventories of aluminum are estimated at about 1 million to 1.5 million tonnes, industry sources said.
Zhang of the NDRC said procurement and reserves are "key measures" of the State Council, or Cabinet, to boost market confidence.
According to the National Bureau of Statistics (NBS), the profits of the non-ferrous metal and processing industry fell 34.1percent year-on-year and those of the iron and steel industry by 13.7 percent during the first 11 months of 2008.
On Thursday, the same day as the NBS announced the profit slump and the SRB announced the procurement plan, Bao Steel Group, China's top steel maker, raised its February steel prices by 100 yuan/tonne to 300 yuan/tonne.
That was Baosteel's fifth price adjustment since August but only the first raise in that period.
In November, China decided to launch a 4 trillion yuan stimulus plan to boost domestic demand over the next two years.
Combined with another 3 trillion yuan for railway construction and post-quake reconstruction, the investments are expected to increase steel demand by 200 million tonnes.
On Tuesday, two days before the price hike, Baosteel's board director Xu Lejiang said despite the many stimulus measures, the industry won't experience a full recovery in the short run.
Wu Wenzhang, general manager of Steelhome.com, an industry website, said steel prices would return to a profitable level in the second quarter next year.