China Power Raise May Hurt 6% of Aluminum Capacity, Chalco Says

China’s decision to raise power surcharges may affect 6 percent of aluminum capacity in the country, according to Aluminum Corp. of China Ltd., the nation’s biggest producer of the metal.

The policy will impact 1 million metric tons of smelting capacity, including Aluminum Corp.’s facility in Henan province, Shen Hui, a spokeswoman for the Beijing-based company known as Chalco, said today by phone.

China, the world’s largest producer of the metal, said last week it will raise surcharges for some aluminum companies by as much as 100 percent from June, to curb overcapacity. Aluminum prices may gain as production costs in the country may jump by $100 a metric ton, according to United Co. Rusal, the world’s biggest maker of the metal.

“Chalco is closing smaller smelters and replacing them with energy-efficient capacity,” Shen said. “So overall our aluminum capacity won’t change.”

Chalco fell 2.9 percent to close at HK$6.05, the lowest level since April 2009, as the European sovereign debt crisis raised global growth concerns and led to losses for commodity producers in Asia.

China will double the surcharge to 0.10 yuan per kilowatt- hour from June 1 for some aluminum companies, the National Development and Reform Commission said May 13.

For some companies that have obsolete capacity that needs to be closed, the government will raise the price by 50 percent to 0.30 yuan per kilowatt-hour, from 0.20 yuan. This could threaten the closure of up to 2.7 million tons of capacity, Barclays Capital had estimated.

Production CostsThe surcharge will increase the costs of making a ton of aluminum by between 700 yuan ($103) and 1,400 yuan for companies affected, said Jia Dongyan, company secretary of Jiaozuo Wanfang Aluminum Manufacturing Co., a Shenzhen-listed unit of Chalco.

Jiaozuo Wanfang is based in Henan, where the government had already removed discounted power rates, Jia said. Smelters consume an average of 14,000 kilowatt of electricity to make each ton of the metal.

Aluminum futures in Shanghai gained 0.2 percent to close at 15,195 yuan a ton.

Producers in China are probably unprofitable as the current price is below the average 15,300 yuan production cost, said Wan Ling, a Beijing-based analyst at CRU International Ltd. CRU expects 1.3 million tons of capacity in the country to be affected by the surcharge.