China smelters brace for next power price move

Power-hungry Chinese aluminium smelters are bracing themselves for higher electricity prices next month after Beijing's second on-grid rate rise in two months, a move that will may force older smelters to cut output or sell out.

China, the world's second-largest electricity producer and consumer and top aluminium producer and consumer, said on Tuesday it will hike on-grid power tariff paid to thermal generators by 0.02 yuan per kilowatt-hour, a rise of about 5 percent, effective from Aug. 20.

Although this will not affect electricity consumers directly since the state-owned grids will absorb the higher cost, smelters say they reckon a subsequent rise will hit them as Beijing battles its worst power deficit in four years, which has already forced some smelters to cut production.

Smelters that did not own power plants and which imported alumina would face problems, likely cutting output or selling assets, said Lan Ke, Beijing-based analyst at Southwest Securities.

The smelters could cut output or sell assets.

Beijing raised average electricity tariffs by about 4.7 percent from July 1, the first rise in two years, but pressure for another hike had mounted since then.

Aluminium smelters' production costs would rise 145 yuan ($21.12) per tonne for each 0.01 yuan rise in power fees, Zhu said.

A hike of 5 percent may raise smelters' production costs by more than 300 yuan per tonne to about 17,800-18,300 yuan per tonne, smelter officials estimated.

At the same time, domestic aluminium prices have fallen nearly 5 percent this month, to 17,930 yuan per tonne on Tuesday.

But improved power supplies could give some smelters the confidence needed to launch tens of thousands of tonnes of new capacity, a trade manager at a large smelter in Henan province said.

Alumina, the main material for aluminium production, and electricity normally make up about 70 percent of production costs for smelters in China.

Expanding losses may boost acquisitions by large smelters, such as Aluminum Corp of China Ltd (Chalco), similar to its 2005-2006 spree when it bought millions of tonnes of capacity.

If China maintained a long-term plan to let the market determine coal and power prices, power fees would continue to rise, possibly making aluminium a low-margin business, he said.

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