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China's power supply crunch seen hitting aluminum output, propping prices

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China's power supply crunch seen hitting aluminum output, propping prices

Highlights

Smelters put off plans to bring new projects online

Aluminum prices strengthen on weak output cues

China's soaring electricity consumption and resulting power supply crunch is expected to curb primary aluminum production in 2021, signaling domestic prices will likely stay elevated in the near term.

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China's primary aluminum industry is one of the major power consumers, and is known colloquially as "electricity-eating tiger."

The country is witnessing an unprecedented demand for electricity in the ongoing summer season, resulting in overloaded energy grids and power outages.

As power usage grows and supply tightens in China, several provinces and regions have ordered local companies to use electricity judiciously.

Producers, which halted primary aluminum capacity earlier, will unlikely resume their projects until power shortages ease off, according to sources. The running capacity of these companies may also get curbed further if power supply crunch prevails.

Meanwhile, planned, new capacity projects in the Yunnan, Guizhou and Guangxi provinces are expected to come online later than expected due to power shortages.

Smelters in Inner Mongolia also remain under pressure as their new capacity is less likely to be put into operation amid a tall ask to lower energy consumption targets.

While power shortages have also curbed production of downstream processors to some extent, the impact is much larger on the supply side, sources said.

As a result, curtailed production and expected increase in demand from construction, packing and exports in the coming months will lend strong support to domestic aluminum prices, sources added.

Price and output curbs

China's primary aluminum prices remain at elevated levels due to widening output curbs caused by power shortages and depleting stocks.

The most-active aluminum contract for September delivery on Shanghai Futures Exchange has remained above Yuan 19,000/mt ($2,934/mt) from July 22, closing above Yuan 20,000/mt for the second straight day as of Aug. 13.

Smelters were wooed by lower electricity prices in Yunnan in southwest China, helping the province emerge as a new hub for primary aluminum production.

However, smelters in the province have been facing challenges recently after authorities asked them to lower their power usage from May amid a power supply crunch.

The operating rate of primary aluminum smelters in Yunnan reached 75.4% in July, down 19.7% from a year earlier, report from Kunming Power Exchange showed Aug. 13.

Smelters in Guangxi and Guizhou are also required to lower their power loads in view of shortages.

Aluminum and power consumption

China's power consumption has been rising phenomenally in recent years.

The country's power consumption rose 12.8% from a year earlier, to 775.8 billion KWh in July, with industrial usage contributing 65.3% to the total consumption, according to the latest data from the National Energy Administration. Power consumption in July was 10.3% higher compared to June.

Meanwhile, China's primary aluminum output totaled 37.08 million mt in 2020.

Producing this output used a total of 500.6 billion KWh/mt of electricity, based on 13,500 KWh/mt gets consumed when producing 1 mt of primary aluminum, according to S&P Global Platts calculations.

China's primary aluminum production accounted for 6.7% of the nation's total electricity consumption in 2020.

Click here for our full coverage on China's power crisis