Yunnan restarts - with a twist

News has come through that the Yunnan government has released additional power units to its local aluminium industry.

We understand about 500,000 tonnes of smelting capacity is allowed to re-enter the market, and local companies are now preparing their pots.

But the news comes with a twist and perhaps a barb in the tail.

The additional power units are being released because of lower-than-expected energy sales to Guangdong province. In other words, it's not because of additional rains. This move to release some metal capacity comes 2-3 months ahead of the normal rainy season.

Consequently, local smelters are "hastening slowly" with their restart plans. AZ Global Managing Director Monte Zhang says that in his chats with the local industry, leaders have expressed some fear that the authorities may revoke the decision. It would only take for Guangzhou She, Shenzhen, and surrounding cities to gain an increase in economic activity, and Yunnan would have no choice but to return the power units to its biggest customer. Remember, too, that these decisions are not the principal realm of the local government - China Southern Grid decides on the power allocation.

China does not need additional primary metal right now. The market has just emerged from the holiday break, which saw inventory levels slowly rise through February and March. Russian metal continues to arrive in the country, and demand has not yet returned to prime levels. (We are approaching the peak season for demand, and there are some signs of improvement, but those signs are insufficient to say that we are back to good demand levels).

The last thing the local smelters need is yet another forced exit. The costs involved in restarting cold pots are enormous—you have to take every pot from room temperature to 950c, and that's done by injecting enormous amounts of electricity into each pot. They have already been ordered to shut down twice in the last two years. Will it happen again this year?

The market dropped slightly following this news. Monte Zhang says that 500,000 tonnes is not enough to make a big difference, especially if it is curtailed again.