The time has come for the electrolytic aluminum industry to face the heat. In their efforts to cut back on excess capacity, the National Development and Reform Commission and the Ministry Industry and Information Technology will impose a price ladder on power consumption for the smelters. The rate rises look set to push up power costs for heavyweight Aluminum Corp. of China Ltd., or Chalco, (02600.HK, 601600.CN) but the fallout won’t be all negative.
The ministries said that for every metric ton of electrolytic aluminum produced, the first 13,700 kilowatt hours of electricity used will be at the present rate of about 0.6 yuan (10 US cents) per kWh across the country. The price will rise to 0.02 yuan per kWh for the next 100 kWh, and any power consumed above that will attract an extra charge of 0.08 yuan per kWh.
On top of that, Beijing has explicitly warned local governments, which usually have strong ties with the aluminum smelters, not to arbitrarily waive the tiered rates. On the surface, Chalco, the country’s biggest aluminum producer, will fall key victim to the hikes because electricity accounts for nearly half of the output costs for electrolytic aluminum. In the first nine months of 2013, the state-owned company incurred a net loss of 1.85 billion yuan.
However, Chalco may not be as severely affected as anticipated. That’s because the company has expanded its own power generation capacity by leaps and bounds in the last two years, which should help neutralize cost pressures. Besides, harsher electricity pricing will crowd out the legion of inefficient producers across the country and when that happens Chalco will be even better placed to regain its lost ground.
Prospects have also brightened since China restarted procurement of high-speed trains and the indigenous civil aircraft industry began spreading its wings. Coupled with a steady growth in the car market, demand for high-quality aluminum products in China is almost certain over the long run.
– Contact the writer at [email protected]