China Hongqiao builds more power plants and secures materials abroad

China Hongqiao Group, which is poised to surpass Russia's Rusal as the world's biggest aluminium producer, plans to spend 10 billion yuan on building power plants and expanding smelting capacity in China and on projects in Indonesia and Guinea.

The Shandong firm aimed to raise its output by 22.5 per cent to about 4.1 million tonnes this year, said Wong Yuting, Hongqiao's head of corporate finance.

Wong also said the firm planned to increase its annual output capacity to about five million tonnes by the end of the year.

This is likely to make Hongqiao the largest aluminium producer since Rusal has indicated its plan for output to remain flat at 3.6 million tonnes this year, while Aluminum Corp of China produced 3.38 million tonnes last year and suffered a record 16.2 billion yuan net loss due to weak cost competitiveness and low price of the metal.

Hongqiao, which made a net profit of 5.3 billion yuan last year, last week said it expected to post a "significant" rise in profit for the first half, citing higher sales following expanded production capacity and lower material prices and energy costs as it sourced more electricity from self-built power plants.

Wong said Hongqiao planned to add 1 GW of power generating capacity this year from two self-built plants and one acquired plant, raising its capacity to 7.6 GW. This means 80 per cent of its power demand will be met by its own plants by the end of the year, up from 72 per cent last year.

While a slump in coal prices of more than 20 per cent this year has cut fuel costs, which typically accounts for over 60 per cent of the cost of power generation, Wong said higher depreciation expense from the power plants would offset most of the savings.

Still, self-produced power means Hongqiao is among the lowest-cost aluminium suppliers in the world. The average cost of its power was 17.6 fen per kilowatt-hour last year, compared with 29 fen for that bought from the power grid. Power typically accounts for 40 per cent of a smelter's costs.

To meet increasingly stringent pollution emission standards, Hongqiao has set aside 1.5 billion yuan for retrofitting its power plants to capture more sulphur and nitrogen oxides, although it is not yet subject to carbon emissions control, which is being tested in seven regions ahead of the launch of a national "cap-and-trade" scheme.

Wong said Hongqiao would build more plants to reach a goal of total self-sufficiency in power by 2021. It has just launched a more energy-efficient production line that would cut 700 kWh of power consumption per tonne of output compared to its existing lines, and over 1,000 kWh compared to the industry average.

It recently signed contracts to invest in a bauxite mining and logistics ventures in Guinea, West Africa. Together with a Shandong port company and a Singapore shipping firm, Hongqiao will have majority control in the logistics venture and less than half of the mining venture.

The first shipment is due to arrive in Shandong in September, and 10 million tonnes are set for 2017, enough to meet 60 per cent of its alumina plants' needs that will see annual capacity rise to six million tonnes next year from four million tonnes last year. Alumina is the intermediate product in the process of turning bauxite into aluminium.

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