Preferential electricity prices for primary aluminum smelters will end by Jan. 1, 2022 in several provinces and regions in China, increasing production costs and adding further upward pressure to domestic aluminum prices, market sources said Oct. 20.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
The move comes as many Chinese smelters are already grappling with rising electricity prices due to a power shortage. The cost of electricity comprised 35.1% of the cost of primary aluminum production in September -- close to that of alumina at 36.5%, according to state-owned research company Antaike.
The Xinjiang Uygur Autonomous Region, China's second largest primary aluminum producer, released a draft notice Oct. 15 that bars the primary aluminum industry receiving preferential prices from Jan. 1, 2022.
Smelters will pay Yuan 0.01/KWh more for aluminum liquid production if their power consumption is 20 KWh higher than 13,650 KWh/mt in 2022, 13,450 KWh/mt from 2023 and 13,300 KWh/mt from 2025, excluding power consumption for desulfurization, according to the draft. This is in accordance with a notice released by the central government's National Development and Reform Commission in late August.
The region's move comes after the Inner Mongolia Autonomous Region and Qinghai and Gansu provinces announced plans to phase out preferential electricity prices to primary aluminum smelters and Yunnan province cancelled its preferential scheme with immediate effect on Sept. 19.
Chinese smelters are expected to remain profitable, although the rise in costs will squeeze their margins, market sources said.
The NDRC's reform of on-grid power tariffs for coal-fired electricity excludes high-energy consuming enterprises from preferential pricing. This will increase the production cost for primary aluminum smelters using on-grid power, but have less impact on smelters with their own power plants or access to hydropower, sources said.
Around 63% of China's primary aluminum capacity had its own power supply at end 2020, Antaike data showed.
However, production costs for smelters with their own power plants are increasing due to rising coal prices.
China's all-in production cost of primary aluminum rose 27.2% or Yuan 3,518/mt to Yuan 16,466/mt ($2,565/mt) in September from January, Antaike data showed.
The country's smelters have been asked to curb production since May due to power shortages and efforts to meet energy consumption targets, boosting domestic aluminum prices amid supply concerns.
The higher production costs and ongoing output cuts were expected to keep domestic aluminum prices elevated for several more months, although accumulating stocks will temper the increase as demand has also been impacted by the power curbs, market sources said.
China's primary aluminum output rose 7.2% year on year to 29.15 million mt over January-September, which would equate to 397.9 billion KWh of electricity consumption, or 6.5% of the country's total power consumption, S&P Global Platts calculations showed. It takes 13,650 KWh of electricity to produce 1 mt of primary aluminum liquid.