Chinese Aluminum Smelter Costs Set to Rise

China’s aluminum smelters have a problem – power, or to be more precise, power costs. Coming fast on the heals of an electric power cost increase announced last week in Henan, the industry has now heard that all subsidized power deals are to be withdrawn.

The announcement last week was a result of rising thermal coal prices pushing up the price for generators in Henan – home for a fifth of China’s production. Spot prices of thermal coal in China’s top coal port Qinhuangdao rose by about 2% last week and are expected to rise further as Chinese power plants buy more coal to build stocks ahead of the peak consuming period in the summer. Generators have pushed up electricity prices by 6% to compensate for a series of rising coal costs and have also advised smelters that they will face rationing if power consumption reaches 75-80% of total capacity. The Henan hike would increase the cash production cost for aluminum smelters in Henan to around 15,500 yuan per ton, compared to the average cost of about 15,000-15,700 yuan for other smelters in China according to a ChinaMining article.

Meanwhile market prices for aluminum have fallen in line with softer demand and a fall back in world prices. Currently domestic China prices are 15,350 yuan per ton according to MetalMiner’s IndX but smelters said they could see capacity being closed if prices dropped to 14,500 yuan per ton.

That was before the announcement last week in a Reuters article by the National Development and Reform Commission to the effect that power costs for energy hungry industries such as aluminum, cement, steel, zinc, ferro-alloy, calcium carbide and sodium hydroxide would double from June 1st. For firms that fall into the restricted category, power surcharges will rise to 0.1 yuan per Kw-hr from 0.05 yuan previously and any preferential power rates in the name of direct trade between power generators and power users but without any approvals must be halted immediately, the report said. In the past ,calls by Beijing to remove preferential power deals have been ignored by regional governments keen to protect revenue and local employment, but now the authorities have issued a direct edict.

Smelters use 13,000-15,000 kilowatts of electricity to produce one ton of primary aluminum in China so a doubling of electricity costs from 0.05 to 0.10 yuan per Kw-hr would add 700 yuan or US$100 per ton to smelter costs. This is enough to nearly bring the spot price of 15,350 back to the 14,500 point at which the industry was saying smelters could close. With the market in oversupply a trimming of capacity would be no bad thing but if played out in any volume would likely support LME prices at or above current levels going forward.