The Shanxi provincial government recently asked local aluminum smelters in northern China’s Shanxi Province to cut production capacities by 50 percent due to power shortages, an industry insider told Interfax on July 7.

“Right now, we are arranging production cuts and preparing for equipment maintenance,” an anonymous senior official with Huaze Aluminum & Power Co. Ltd., a major aluminum smelter in Shanxi Province, told Interfax.

Although the company has its own thermal power stations that feed electricity straight to its aluminum smelting facilities, the official said its power stations are actually operating at low levels on tight coal supplies.

Huaze Aluminum, a joint venture between The Aluminum Corporation of China (Chinalco) and Shanxi Zhangze Electric Power Co. Ltd., is capable of producing 280,000 tons of primary aluminum per annum.

“Power shortfalls act as a bottleneck for all of Shanxi’s aluminum smelters,” the official said.

According to CBI China’s latest report, Shanxi’s power shortfalls have forced around 700,000 tons of aluminum smelting capacity to come to a standstill so far this year. CBI China predicts more aluminum smelting capacities in Shanxi will be suspended in the coming weeks due to tightening power supplies.

In order to secure power supplies for local residents, the Shanxi Power Grid raised power tariffs for industrial users, including aluminum smelters, by RMB 35 ($5.10) per megawatt hour from July 1.

As one of China’s most energy intensive industries, aluminum smelters consume 14,500 kilowatt hours to 15,000 kWh to produce 1 ton of primary aluminum.

“Production cuts among Shanxi smelters are expected to support domestic aluminum prices,” Lei Wanjun, an analyst with Great Wall Securities in Shenzhen, told Interfax on July 7.

“However, as the domestic aluminum market still faces a surplus and this year’s downstream consumption has not been as high as previously expected, the production cuts may have a limited impact on the whole market,” Lei said.

Downstream industries such as construction, electric appliance production and automobile manufacture, are seeing a slowdown in growth due to tightening monetary policies, according to Lei.

The most active September aluminum contract on the Shanghai Futures Exchange (SHFE) rose by 1.52 percent to RMB 19,700 ($2,873.10) per ton on July 7. The cash price of primary aluminum in Shanghai ended RMB 105 ($15.31) lower to close at RMB 18,860 ($2,750.59) per ton.

Interfax commentary: Northern China’s Shanxi Province, the country’s power production center, is likely to see much more severe power shortages this summer, as coal supplies are tightening. China has been pursuing a policy of eliminating small coalmines over the past few years, which has led to current coal supplies becoming more strained.

As a result, even aluminum smelters with their own power plants, are having to cut production.

If, as expected, power shortages continue or worsen, it may provide support for aluminum prices in coming months, and the effects of a Chinese aluminum surplus may be addressed to some extent. It may be a long time before smelters resume full production.

Another bonus of the increasing electrity, fuel and coal prices and resultant tight supplies is that they are accelerating the consolidation of energy-intensive industries in China, such as aluminum smelting, and steelmaking.

source news : Interfax-China 2008

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