Chinese aluminium industry faces electricity price hike

China`s huge energy-guzzling aluminium industry may have to pay higher prices for electricity in the second half of 2008, as generators raise tariffs to offset a 60% jump in coal prices in the past year.

Increased power costs could erase smelters` profits and prompt higher cost producers to close capacity, starting as soon as the first half of next year, smelter officials and analysts said.

China, trying to keep inflation in check, has kept power tariffs essentially unchanged since 2006, despite strong coal prices, which have risen more than 60%in the past year. But smelter officials believe Beijing may allow power operators to raise fees to industrial users as soon as July to keep loss-making power plants from stopping production.

"Many people anticipate the hikes will come in the fourth quarter, while some say the hike may happen before the Olympics," Geoffrey Cheng, a director at Daiwa Securities` research unit in Hong Kong said. "After the hikes, some smelters may not be profitable."

Unexpected closures of smelting capacity in China could cut global supply of the metal, which is used in the construction, packaging and automotive sectors, boosting prices on the London Metal Exchange.

China, the world`s largest producer of the lightweight metal, is expected to produce some 15Mt of aluminium in 2008, about 18% of the world total, and at least another 3Mt of capacity is scheduled to start production by year end.

A senior executive at a large smelter in northeastern China said the plant had received verbal confirmation from a local power operator that its bills would rise by 0.03-0.05 yuan per kilowatt (kW) from July.

That would add at least 450 yuan (US$64.5) per tonne to a smelter`s energy costs. Some 15,000 kW are used for production of one tonne of primary aluminium in China. Already cash production costs in China are around 17,500-18,000 yuan a tonne, leaving margins of 500-1,000 yuan.

"Although most of the newer smelters have their own captive power supplies, the smaller, older smelters will see further pressure on their margins," Gayle Berry, an analyst at Barclays Capital, said. "It`s the 80,000-120,000t smelters that are really going to get squeezed because they buy from the grid on a spot basis and are less efficient. They made up around  30% of China`s production last year."

Some 6.82 gigawatts of coal-fired power capacity had been shut down as a result of coal shortages, the State Electricity Regulatory Commission said.

The smelter executive also said high fuel costs meant thermal power plants were extending maintenance shutdowns to limit their losses from selling power at government-fixed prices. "This year`s power shortage is not because of under-capacity. It is about prices," the executive said.

Even the country`s top aluminium producer, Aluminum Corp of China Ltd, said it had cut production at one plant because of reduced power availability.

Industry sources believe Jiaozuo Wanfang Aluminium in Henan province had cut production by 68,000t of its total annual capacity of 480,000t.

Henan relies on thermal power and boasted about 3Mt of smelting capacity last year, nearly 20% of China`s total. But even if, as some smelters believe, electricity prices remain unchanged, smelters could face energy shortages.

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