China to impose tiered power tariffs on aluminum smelters in Jan. 2014

China will impose tiered power rates on aluminum smelters, starting on January 1, 2014, as part of its efforts to address severe overcapacity in the industry, Shanghai Metals Market has learned.

Power tariffs for aluminum smelters will be based on the amount of power used in the previous year. Power tariffs will remain unchanged for smelters that use no more than 13,700 KWH of AC power for per ton aluminum liquid produced, while those that use between 13,700-13,800 KWH will be charged an additional 0.02 yuan per KWH. Smelters that consume more than 13,800 KWH for per ton aluminum liquid produced will be charged an additional 0.08 yuan per KWH, according to the Notice of Tiered Power Rates for Aluminum Smelters jointly released by the National Development & Reform Commission (NDRC) and Ministry of Industry & Information Technology (MIIT).

The new policy targets power consumption for aluminum liquid, which is lower than that for aluminum ingot. 1.6-1.7 million tpy of the aluminum production capacity in operation consumes over 13,700 KWH of AC power per ton aluminum liquid; 1.2-1.3 tpy consumes more than 13,800 KWH for per ton aluminum ingot, SMM estimates.

The notice stipulates that local governments may not reduce power rates for aluminum smelters and must stop all previously offered subsidies. Local governments must also cease fee deductions and other incentives to smelters with their own power plants. This move will help weed out less competitive producers and slim the sector, which has been mired in capacity surplus for years.

Over 1.2 million tpy in aluminum capacity was slashed in China in 2013. Further capacity cuts may be on the way next year given the sluggishness in the sector.

That being said, some smelters may underreport power consumption and it remains unclear in the notice as to what constitutes power consumption for aluminum liquid production, meaning that the real impact on aluminum smelters may be limited.