Cost pressures puts up challenged upon China’s emerging aluminium hub Xinjiang

The rise of China’s Xinjiang province as a hub for aluminium production may be challenged in the coming years by increasing transport and labour costs, and its difficult geographical location, market participants said.

Once a comparatively small cog in China’s aluminium production, northwest China's Xinjiang has emerged as a very significant location for producers this year, with a rate of growth behind only Henan province.

In the first eight months of 2013, Xinjiang’s aluminium output accounted for 10% of China’s total production, up from 4% last year.

Its contribution is expected to rise further before the end of this year, with about 1 million-tonnes of new capacity expected to come online.

“Xinjiang is [a dark horse] as its aluminium output rose quickly thanks to new capacity,” Wang Rong, an analyst at Guotai Junan Futures in Shanghai, said.

The low power costs that the province enjoys, however, may rise as more smelters come on stream, while other costs also climb.

Smelters in Xinjiang pay 0.18-0.2 yuan (2-3 cents) per kwh for power if they have their own generators and about 0.35 yuan per kwh if they buy power from the state grid.

This is much cheaper compared with smelters in other parts of China.

Power accounts for about 40% of aluminium’s production cost.

“Eastern China smelters are not competitive at all if power costs are considered. That is why only three major aluminium smelters in Shandong province can survive,” Wang said.

Among them, Shandong’s Weiqiao has its own power generator, which lowers its power costs to as low as around 0.20 yuan per kwh, and the other two, Xinfa and Nanshan, pay about 0.3 yuan per kwh, according to Wang.

Ailing market woes

In south-west China, power costs average about 0.5 yuan per kwh, even for hydro-electric power.

Many smelters there have to seek local government subsidies in the face of consecutive losses amid an ailing market, according to participants.

“That [government subsidy] is not enough for companies and smelters have to wait for months before getting [subsidies],” another analyst said.

For Xinjiang, the power cost advantage may dwindle as more smelting capacity is added.

Xinjiang’s aluminium capacity will reach 4 million tpy by the end of this year, with more to come over the next years, according to analysts.

“We understand that a major aluminium smelter was not able to run most of their new capacity in the second half of last year due to shortage of coal during […] this year, as coal supply is not a problem, it is running normally,” Xu Huimin, an analyst at Huatai Great Wall Futures in Shanghai, said.

Smelters in the region have been mainly relying on alumina from Shanxi and Henan. They have to pay 1,500-1,600 yuan to transport each tonne of alumina into Xinjiang for smelting, according to analysts.

Labour costs are also higher in Xinjiang.

“It would cost more than 6,000 yuan per month to retain a skilful worker there, compared with around 3,000-4,000 yuan per month in other provinces. Smelters find it hard to retain a good worker at that wage level,” Wang said.

The freezing winter between November and February makes transportation hard.

“If you look at the market supply, you will see that there is almost nothing from Xinjiang between the period as it is impossible to delivery shipments,” Xu said.

Increased environmental concerns among local government officials offset the autonomous-region advantage.

“A [Xinjiang] government official has clearly told us that they don’t have any plan to approve more aluminium smelters. They have approved 6 million tpy of aluminium capacity, but it just can’t keep increasing boundlessly. You will have to think about the environment,” Xu said.