China Provinces to offer power subsidies to aluminum smelters

Cost pressures on China’s beleaguered aluminum industry could ease in the coming months as a number of provinces introduce power subsidies to reduce hefty electricity bills weighing on the energy-intensive sector.

Plans are underway in central China’s Henan Province, which accounts for about a quarter of national production, for a subsidy of RMB 0.05 ($0.008) to RMB 0.08 ($0.013) per kilowatt hour (kWh) for aluminum smelters, including local leaders Henan Zhongfu Industrial Co. Ltd. and Jiaozuo Wanfang Aluminum Manufacturing Co. Ltd. (Wanfang Aluminum), said Li Xun, chief analyst with Myyouse.com.

Aluminum is a pillar industry in the province but producers are undergoing “severe difficulties”, China Business News reported Wednesday citing a top executive at Wanfang Aluminum. “The Henan government earlier conducted assessments of some smelters, and will probably adopt some supportive measures,” the unidentified executive told the newspaper.

Shenzhen Stock Exchange-listed Wanfang Aluminum saw net profit fall 55 percent year-on-year in the first quarter (Q1) to RMB 27.3 million ($4.29 million). In a filing with the exchange, the company attributed the drop to weak aluminum prices and higher electricity costs.

Chalco, Wanfang Aluminum’s controlling shareholder with a 24 percent stake, posted a RMB 1.09 billion ($171.32 million) net loss in Q1 against a RMB 331.17 million ($52.05 million) profit in the same period last year. Chalco, China’s largest aluminum producer, warned of another loss this half (Q1) amid lower profit margins.

Elsewhere, Yunnan and Sichuan provinces are also considering electricity subsidies for aluminum makers following increased hydropower supplies with the arrival of south China’s rainy season in May, said Li.

Guizhou Province meanwhile introduced a subsidy of RMB 0.03 ($0.0047) per kWh at the beginning of the year, and neighboring Guangxi Zhuang Autonomous Region started providing a subsidy of RMB 0.10 ($0.016) per kWh last month, said Li.

Power accounts for 40 percent of aluminum production costs in China, and rising tariffs have added to the pressures of soft downstream demand and weak prices for the metal. Further contributing to the difficulties have been Beijing’s efforts to prevent local governments from offering preferential electricity rates to energy-intensive industries in a bid to ensure residential power supplies.

Provincial governments have been reluctant to comply, however, as energy-intensive industries such as steel and aluminum play an important role in local economies. Aluminum makers are unwillingly to suspend capacity for cost reasons.

While the subsidies will help smelters reduce overhead, profit margins could still be eroded by a further fall in aluminum prices if output remains high and the supply glut grows, Li added. The volume weighted average price for the metal on the Shanghai Futures Exchange was RMB 15,877 ($2,495.48) per ton on Wednesday, down 14.17 percent from a peak of RMB 18,498 ($2,907.44) on Aug. 1, 2011.

Aluminum output in China nonetheless grew 9.5 percent on the month in May to 1.68 million tons, up 9.1 percent from a year earlier, according to the National Bureau of Statistics (NBS). Production in the first five months climbed 10.5 percent from the same period last year tons to 7.8 million tons.