Shanghai aluminium drops on prospect of cheaper power in China

Shanghai aluminium dropped on Thursday after the Chinese government announced measures to cut power prices, which traders bet would lower the production costs of local aluminium and depress prices.

Aluminium traded on the Shanghai Futures Exchange fell more than 2 percent before trimming losses to 13,140 yuan ($2,118) a tonne by 0218 GMT, still down 1.8 percent.

Increases in production have weighed on prices that were already struggling due to oversupply.

"What the government announced overnight is a cut to the price of power. The beneficiaries, in terms of power users, are obviously aluminium among other sectors," said analyst Lachlan Shaw of UBS in Melbourne.

China is to cut the price of electricity supplied to the grid by thermal power generators following a decline in coal prices, the cabinet said. It was not clear if those cuts would apply to industrial companies, but the Chinese market was pricing in lower costs, traders said.

Chinese-based manufacturers of semi-fabricated aluminium products have ramped up exports to global markets over the past year, easing a shortage and putting pressure on aluminium prices and premiums. Alcoa Inc raised its surplus forecast to 326,000 tonnes in 2015 due to these exports.

"If that arbitrage (with LME) widens, then we're back into the realms of more semis to come out," added Shaw.

But LME aluminium slipped just 0.2 percent to $1,767 per tonne.

"It's related to the power price cut. But the price is already very low. I think below $1,750 is a good opportunity to buy," said a trader at a brokerage in Hong Kong.