China's green policies push aluminum smelters to step up overseas investment

Chinese aluminum companies are looking to expand abroad as China's climate change policies constrain domestic expansion.

They plan to build at least 8 million metric tons of aluminum smelting capacity in countries that are part of the Belt and Road Initiative, including Indonesia, Malaysia and Saudi Arabia, according to state-backed research house Antaike. The planned capacity is equivalent to 18% of the country's 2022 smelting capacity, but most projects are still in the early stages.

China, the world's biggest aluminum producer, has set a ceiling for domestic aluminum capacity at 45 MMt/y since 2017 in an effort to address yearslong overcapacity and decarbonize energy-intensive sectors. The country's primary production growth has fallen below 5% every year since 2018, including a contraction in 2019, data from the International Aluminium Institute showed, and its aluminum capacity reached 44.3 MMt at the end of 2022, according to Antaike.

"Because of the capacity ceiling, [Chinese companies] do not have the conditions to continue to expand business at home, so they start to look outside the country," Shen Lingyan, a senior analyst at Antaike, said in an interview.

Domestic expansion struggles

In 2013, China introduced a capacity replacement scheme for highly polluting and energy-consuming sectors, including steel, cement, aluminum, sheet glass and shipping. Before companies could build new projects, the policy required they swap capacity quotas with closed and idled projects.

"The policy of replacement capacity in China fundamentally restricts the expansion of aluminum capacity in the country, which may drive Chinese producers to look for opportunities abroad," said Edgardo Gelsomino, head of aluminum research at Wood Mackenzie. "It is also making new smelter projects in China more expensive as the price of capacity quotas stays high."

Gelsomino said China's carbon neutrality targets also make it "increasingly difficult for investors to obtain approval for captive coal-fired power plants for new smelter projects in China, making investing abroad an option to consider."

China's aluminum sector accounts for more than three-quarters of CO₂ emissions from the country's metals industry. Thermal coal supplied 82% of the energy used in China's primary aluminum production in 2021, compared with the global average of 57%, data from the International Aluminium Institute showed.

Aluminum companies have been shifting production to hydropower-rich areas from coal-reliant regions through the capacity swap scheme. However, smelters have been forced in the past two years to cut production and delay shifting plans due to power shortages amid heat waves and droughts.

Moving downstream in Indonesia

Indonesia has become the top destination for Chinese aluminum investment thanks to abundant energy and mineral resources, including bauxite, an aluminum ore.

Chinese companies have already invested in alumina plants in Indonesia and are likely to further invest in aluminum smelters to extend the industrial chain, Antaike's Shen said. Indonesia's upcoming bauxite export ban may also lure foreign investment in downstream facilities, Shen said.

At least five Chinese companies are investing in or building their own aluminum projects in Indonesia. Indonesia Huaqing Aluminum Co., Ltd., a joint venture of nickel and stainless steel giant Tsingshan Holding Group Co. Ltd. and chemicals firm Huafon Group Co. Ltd., started to smelt aluminum March 27 and expects to reach an annual capacity of 250,000 metric tons in 2023, according to Antaike.

Shandong Nanshan Aluminium Co.Ltd. owns a 2 MMt/y alumina plant on Indonesia's Bintan Island that uses local bauxite. The company plans to invest 6.1 billion Chinese yuan to build a 250,000 t/y aluminum plant and 260,000 t/y carbon electrode plant in the Bintan Nanshan Industrial Park, the company said in an April 25 statement to the Shanghai Stock Exchange. The aluminum plant is expected to completed in July 2026.

Indonesia is rich in bauxite and coal, providing ideal conditions to develop an aluminum supply chain, Nanshan Aluminum said. It can also lower aluminum smelting costs by utilizing alumina resources in the same industry park, it said.

Looking for cheap energy resources

Aluminum companies are also weighing investment in energy-rich countries with close trade ties with China to answer Beijing's "going out" strategies and Belt and Road Initiative.

Companies including Aluminum Corp. of China Ltd. were considering building aluminum plants in Saudi Arabia more than a decade ago, but low aluminum prices chilled outbound investment. China's production ceiling has made Saudi Arabia more attractive, along with Saudi Arabia's vast natural gas reserves and established aluminum industry, Antaike's Shen said.

Shandong Innovation Group Co. Ltd. signed an agreement to build an aluminum plant in Saudi Arabia shortly after Chinese President Xi Jinping and Crown Prince Mohammed bin Salman met in Riyadh, Saudi Arabia, in December 2022.

Meanwhile, China's Bosai Minerals Group Co. Ltd. aims to build a 1 MMt/y aluminum plant in the Malaysia-China Kuantan Industrial Park in Malaysia. Smelter investors in Malaysia will have to secure access to hydropower, especially as aluminum's green credentials will be critical to financing, Gelsomino said.

As of May 8, US$1 was equivalent to 6.91 Chinese yuan.

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