China: energy scarcity for the conversion to green will hit aluminum production and its prices

An expected electricity shortage in China's Yunnan province in 2024 could slow the transfer of primary aluminum production capacity to the region, an industry trend that has strengthened in recent years. The attempt to generate more clean energy is affecting the region's energy availability and therefore the production of energy-intensive materials such as aluminum.

Yunnan, in central China, is a region rich in hydropower generation, but will face an electricity shortage in 2024, expected to reach 27 billion KWh, according to the latest report from the Kunming Power Exchange Center supported by the state.

Thanks to the availability of clean energy and related decarbonization opportunities, China's aluminum industry has been attracted to Yunnan in recent years and has moved production capacity to the region from traditional hubs. This has put Yunnan in the spotlight as an emerging hub for aluminum production in China. The Yunnan government set the target of the province's total primary aluminum production capacity at 8.26 million tons per year, but now these targets

The attempt to gain an advantage over the CBAM

The transfer of primary aluminum production activity seemed like a very smart move for Chinese companies to gain an advantage in aluminum supplies to the EU under the future CBAM regime, i.e. carbon-based border duties: in fact, Yunnan would have counted on an energy supply based mainly on renewable sources, with hydroelectric power acting as the lion.

The problem that is occurring is that green, renewable energies are proving to be a big problem because they are not reliable in the continuity of supply and subject to environmental factors.

Struggle for energy supply in Yunnan

Aluminum smelters generate heavy energy consumption, but Yunnan has faced unfavorable drought weather conditions in recent years, which have impacted hydropower generation and led to persistent limitations in aluminum production. Unfortunately the region had heavily relied on this form of energy

Frequent production cuts at local aluminum smelters due to energy shortages, especially during the "low water season," have hampered smelters' plans to reach the provincial capacity target.

The low-water season in China typically refers to lower availability of water resources and depletion of water levels, mostly occurring from December to April.

Yunnan's primary aluminum smelters have been ordered to reduce electricity consumption starting from November 2023, which will result in a theoretical cut in production capacity of more than 1.1 million tonnes, market sources said.

Previously, smelters first requested to reduce production in May 2021, due to similar energy supply conditions and related controls. These limitations were implemented in several cycles over the next few years.

The problem is that aluminum smelting operations are expensive and can only operate in a continuous cycle. This means that energy interruptions are a serious problem for plants, which find themselves operating at much higher costs.

The region has become a destination for productive activity

The electricity shortage has emerged as a bottleneck for the development of Yunnan's industrial economy, the Yanshan county government said in a January report.

Yanshan, part of Yunnan, is home to the Yunnan Hongtai New Materials smelter. Hongtai has a primary aluminum production capacity of 2.03 million tons, and about 1.49 million tons were cast later, the government report showed.

Yunnan's primary aluminum production capacity in 2020-2023

Company	2020	2021	2022	2023
Yunnan Aluminum Co	239	267	305	305
Yunnan Qiya Metal Co	0	10	24	35
Yunnan Hongtai New Materials Co	10,583	21,166	100.63	148,777
Yunnan Shenhuo Aluminum Co	75	75	90	90
Total	324,583	373.166	517.63	578,777

Source: Government | Unit: 10,000 mt/year

The world's largest aluminum producer, China's Shandong Weiqiao Aluminum & Power, has begun moving operations from Binzhou city in Shandong province to Yanshan county, with the distance between the two locations being about 2,500 kilometers. This capacity has been operated by Hongtai New Materials since 2019, according to the company.

Shandong Weiqiao plans to shift another capacity of 1.93 million tons per year to Luxi county of Yunnan's Honghe prefecture, the company said. These operations have yet to begin, he added.

The Yunnan government canceled a new 500,000 tonnes per year Yunnan Aluminum project earlier this year, local media reported.

Previously, Yunnan Aluminum had transferred 135,000 mt/year under the transfer quota to Chalco Qinghai. Yunnan Aluminum explained the reason for the transfer, saying the quota was inactive and fell outside the Yunnan government's total capacity target of 8.26 million tons per year.

What will happen now?

Yunnan seeks to reallocate electricity for aluminum production, but concerns persist. The recovery in aluminum demand came sooner than expected, thanks to falling energy demand in eastern China and the rise of wind and solar power.

However, power outages and supply controls persist, threatening production stability. Transferring production capabilities abroad, such as to Indonesia, remains an option for Chinese foundries.

In the meantime, however, problems remain and, if there were further cuts to energy supplies, this could have consequences on the stability of the aluminum supply and its prices. In the event of an increase in Chinese domestic consumption, prices could increase not only on the domestic market, but globally.

Prices are expected to grow to 2400-2450 USD per tonne .

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The article China: energy shortages for the conversion to green will hit aluminum production and its prices more comes from Economic Scenarios .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/cina-la-scarsita-energetica-per-la-conversione-al-green-piu-colpire-la-produzione-di-alluminio-e-i-suoi-prezzi/ on Tue, 26 Mar 2024 12:25:43 +0000.