Via AG Metal Miner
China's aluminum production faces a "touch and go" situation once again. In this case, the problem is mainly due to a power supply crisis in the southwest area of the country. The Yunnan province, the aluminum manufacturing hub of southern China, is reducing production of the metal due to a severe water shortage. This shortage has, in turn, hampered the area's hydroelectric power supply. Currently, the impact this will have on the global aluminum price remains unknown.
According to reports, the hydroelectric electricity generation capacity in the area is down significantly. In response, the provincial leaders sent a notice to Yunnan Aluminum last month telling the company to reduce its power consumption, which could impact the aluminum price index. Yunnan Aluminum is a major smelter location in the province, though far from the only one. Thus far, the province has requested that aluminum smelters cut production on three different occasions since last fall: by 10% in September, then by 20%, and, most recently, by 40%.
This problem comes at a time when China is still recovering from COVID-19 restrictions. Moreover, the country continues to stand on the cusp of renewed economic recovery. If successful, many experts believe this recovery will result in higher demand for metals like aluminum.
Manufacturing activity in the world's second-largest economy continued to expand at the fastest pace in more than a decade in February. Incidentally, China is both the world's largest producer and consumer of aluminum. As such, both positive and negative news from the country can dramatically affect aluminum price points.
According to the General Administration of Customs, China imported a record 374,321 tons January-February this year. This represented an increase of 11.3% from a year earlier, underlining just how much pressure China has on the gas pedal.
Despite this, the global aluminum price during these two months made imports unattractive. For instance, the benchmark aluminum contract on the London Metal Exchange registered a monthly average of US $2,644 a ton in January, the highest since May 2022. This was soon followed by a slide to an average of $2,373 a ton in February.
According to Reuters, the bulk of China's imports came from Russia. Indeed, imports from Russia more than tripled in the two months, with a 266.2% surge.
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With provinces like Yunnan facing yet another energy crisis, China's main aluminum smelters continue to consider shifting some of their capacity overseas, mostly to Indonesia. A report by SandP Global said the move, if adopted, would come at the right time for China. Indeed, Indonesia plans to ban the export of key raw material bauxite starting this June.
Last year, China accounted for about 59% of global primary aluminum production. Though the country's authorities capped aluminum production at 45 MTA, it very nearly touched that figure last year. This year, some experts forecast demand to be much higher and the aluminum price index to fluctuate. This could either mean a step up in aluminum production or an increased reliance on imports.
Of course, reduced rainfall and the subsequent water cuts are not helping the industry. Already, there is talk of more power shortages throughout the rest of 2023. What's more, Yunnan's efforts at using clean energy need to be sustained this year. Otherwise, that, too, could affect aluminum production. For now, shifting smelters abroad seems to be a good option.
By Sohrab Darabshaw
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