Soaring energy prices coupled with stagnant economy bear red flag for aluminium industry; China initiates production cut

The high possibility of global recession and economic stagnation has already alarmed countries like China, the world’s largest consumer of primary aluminium raw materials, flagging the risk of downsized markets. China, who has been battling with increased energy costs and heat wave, previously reported some aluminium and alumina capacity cut at Sichuan and Chongqing provinces.   

According to a report last week, the aluminium production cut in Sichuan became intense from 395,000 tonnes to 777,000 tonnes, with mere residual capacity at 230,000 tonnes out of total installed capacity at 1.07 million tonnes.

Chongqing was no exception but experienced a production cut due to high temperature, despite smelters having more dependence on thermal power, whereby heat energy is converted to electrical energy. Of 158.6 million tonnes of total installed capacity, 717,000 tonnes is now operational.

Henan also received an order for ‘orderly transmission consumption’ last week from the provincial communist party and government. The order directed 13 cities in the province, including the capital Zhengzhou and historical city Luoyang to cut electricity consumption. Following the order, Yugang Longguan Aluminium smelter in Henan has reduced its output by 50,000 tonnes.

In this situation, many industry players are likely to bank on the fact that China will launch a big stimulus package soon, said Jean-Sebastian Jacques, former CEO of Rio Tinto.

The high cost of electricity causing high primary aluminium production cost led to a surge in global aluminium benchmark price on the London Metal Exchange. But despite that, the leading miner Rio Tinto posted a fall in half-year earnings and lowered shareholder payouts.

The International Monetary Fund forecasts a 2.9 per cent slower economic growth in 2023, driven by higher interest rates, inflation and prolonged energy crisis.

It is to be noted that China’s relation with Western countries worsened this year following the geo-political turmoil for Russia-Ukraine tension. Furthermore, the mood deteriorated after the US House of Representative Speaker visited Taiwan against Beijing’s wishes. If this leads to demand fall and low prices, companies might consider reducing capex, review discretionary spending and slow recruitment, added Jean-Sebastian Jacques.

Beside China, exorbitant energy prices have led many aluminium smelters and plants in Europe cut production. Since 2021, 1 million tonnes of total 4.5 million tonnes of Europe’s aluminium production capacity has been reduced, while another 500,000 tonnes is under threat, according to Citi analysts.

Dutch aluminium producer Delfzijl Aluminium, Alcoa’s San Ciprian aluminium smelter in Spain, and Alro Slatina in Romania initiated the capacity reduction process in 2021, while Dunkrik aluminium smelter and Slovenian company Talum underwent closure in 2022.