Power cost- the key factor to limit Chinese aluminium smelters’ competitiveness

Escalating power cost is going to be the single critical factor for the Chinese aluminium smelters trying to stay competitive in the domestic as well as international market- China Cheng Xin International Credit Rating Co. (CCXI) made this observation amid slowing Chinese economy and somewhat declining demand for aluminium.

Currently, Chinese aluminum smelters source power mainly in three ways: grid power, captive power, or by purchasing power directly from power plants. High grid power tariffs are increasingly making aluminum smelters economically unviable against falling aluminum prices .

Local governments are encouraging aluminum smelters to sign power purchasing agreement directly with local power plants via a market-based mechanism. This has helped reduce cost of production to a certain extent and improve competitiveness for smelters, but certainly the measures are not adequate given the continuous capacity expansion of the smelters and resultant rise in demand for power.

Faced with slowing demand, chronically depressed aluminum prices and high production costs, a growing number of aluminum smelters have built captive power plants. However, this has not yet resulted in any production cutback which would have been be a far more welcome initiative from the smelter operators' side. Instead, new aluminum capacity is shifting to western part of the country, where power costs are relatively lower.