China power price cut may end up hurting aluminium prices

A helping hand from the Chinese goverment to the slowing economy in the form of cheaper power tariffs may result in further plummeting of aluminum prices, worsening a glut that is already threatening aluminium producers worldwide.

On-grid power tariffs in China may be reduced as soon as next month to benefit industrial users and bolster growth. The cut to the price the state grid pays to power generators for electricity would likely be passed on to consumers, according to the analysts. For smelters hooked up to state supplies, which account for a quarter of capacity, that could cut costs by 375 yuan ($59) a metric ton, they observed.

Aluminum is the second-worst base-metal performer over the past year as supplies top demand and investors desert commodities, with benchmark prices in London sinking to a six-year low this week. If prices remain at current levels , the entire U.S. smelting system is at risk, warns industry experts.

In China, “some smelters could stay alive longer with the subsidy,” according to an market research firm that estimates 66 percent of producers are losing money. The reduction in costs from an electricity-tariff cut will weigh on prices because of the supply glut, they said.

On-grid power prices may be shaved by 0.03 yuan per kilowatt hour, according to trade sources, who said the reduction may take effect in some regions from as early as November 1. While that may seem a modest sum, electricity typically accounts for more than 40 percent of the cost of producing aluminum in China, where output is still rising even as growth slows.

Three-month aluminum dropped to $1,460 a ton on the London Metal Exchange on Wednesday, October 28, the lowest price since June 2009.

If the China smelters’ cost reduction from the electricity tariff cut is passed on, aluminum will fall to $1,400 a ton, an analyst forecast in a report.