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Aluminum: Production Resumption is Nowhere in Sight

As aluminum price rose, Qinghai Provincial Government, the Power Grid and aluminum factories unfolded a new round of consultation. According to previous consultation result, when aluminum price is below 11000 yuan/tonne, aluminum factories can receive 0.1 yuan electricity price discount, when aluminum price is between 11000-11500 yuan/tonne, aluminum factories can receive 0.07 yuan electricity price discount, and the current aluminum price is approaching 12000 yuan/tonne, therefore both the government and the power grid considered the previous policy need to be cancelled. Currently consultation among three sides is now under way.

Preferential electricity prices for aluminum factory are mostly temporary “relief” measures, and it’s inevitable to be cancelled when enterprise profit-earning performance improves: Last year, in the fast falling process of aluminum price, aluminum factories acquired “preferential electricity price” from power grid under government mediation. These “preferential electricity prices” are mostly temporary relief measures, as aluminum price recovered, enterprise profit earning condition improved, the preferential electricity prices in Qinghai and Gansu faced the fate of cancellation.

Only electricity cost of aluminum enterprises in Yunnan Province might continue to fall as a result of benefit from power system reform. Meanwhile aluminum factories with self-provided power will not receive any impact.

The road of production resumption may be far longer than expected: In 2015, more than 4 million tonnes of electrolytic aluminum capacity was forced to be overhauled or closed down, because production resumption has high requirement for turnover capital, for instance 100,000 t/a capacity needs up to 100 million yuan of resumption capital, against the background of supply side reform and banks’ reluctance to lend money to surplus industries, the possibility of production resumption through financing by electrolytic aluminum enterprises is diminishing.

If electricity price discount is indeed cancelled, previously slight-earning enterprises in Northwestern China may face even less profit, or even sustain loss, enterprise survival becomes more difficult, let alone production resumption.

The aluminum supply-demand situation continues to improve: According to the current launching of newly added capacity and resumption of closed-down capacity, the supply shortage situation may continue throughout the whole year. The situation in 2017 will not be pessimistic either. As the reform of supply front continues to make progress, along with adjustment in self industrial structure of electrolytic aluminum enterprises, electrolytic aluminum capacity with high energy consumption or far away from consumption places will continue to exit the market, the situation of inadequate electrolytic aluminum supply is expected to continue.

In the process of propelling reform of the supply front, and improving supply demand structure in the electrolytic aluminum industry, advantageous electrolytic aluminum enterprises will reverse their profit earning status.