Column: Rainfall plays key role in capping Chinese aluminium capacity: Andy Home

China Hongqiao

03/11/2023 13:59

By Andy Home
       LONDON, Nov 3 (Reuters) - Another month, another new
record for China's primary aluminium production sector. 
    Output in the world's largest producer of the light metal
has increased by an annualised 2.3 million metric tons since
March and hit a fresh peak of 42.6 tons in September, according
to the International Aluminium Institute. 
    The production surge has refocused minds on the government's
capacity cap of 45 million tons, a measure dating back to 2017
which requires new smelting capacity to be offset by closures of
older plants. 
    Given the gap between operating rates and name-plate
capacity, has the 45-million marker already been breached? Will
Beijing stick with the ceiling or is there wriggle room? 
    And, more importantly, does it actually matter? 
    Smelters in Yunnan are once again being asked to turn off
production lines as the hydro-rich Chinese province struggles to
balance its power grid due to persistently low rainfall. 
    Power availability is proving to be as effective a cap on
China's aluminium production as any government mandate.     
    NO RAIN STOPS PLAY IN YUNNAN
    Smelters in Yunnan started powering down this week to comply
with energy curbs over the southwestern province's dry season.
    The cuts agreed with the China Southern Power Grid amount to
around 1.15 million tons of annualised capacity. 
    The impact on operators will vary from 9% to 40% depending
on the ratio of liquid metal transfer, according to AZ
Consulting, which keeps close track of what's happening in
China's giant aluminium sector. 
    Several producers have in recent years swapped out old
smelters using coal-fired power in other provinces for new
"green" hydro-powered plants in Yunnan. 
    Smelter capacity in the province now amounts to just over
six million tons and until this week production was running at
around 5.7 million tons, according to AZ Consulting. 
    Some of that production capacity has only just been powered
up after a previous round of restrictions was lifted in June.
    Indeed, the return of Yunnan's production has been a key
factor in the country's record run rates over the July-September
period. 
    But Yunnan has now passed its annual production peak and,
given the province is the fourth-largest region for electrolytic
aluminium, Chinese output has now also likely peaked. 
    
    WEATHER WATCH
    This week's curtailments are expected to last until the
return of Yunnan's rainy season in May. 
    But it all depends on the weather. 
    The province has been experiencing prolonged drought
conditions, which is why smelters were only given the green
light to lift production as recently as June and July. 
    While northern parts of the country saw some of the heaviest
rain on record this summer, Yunnan didn't. 
    Precipitation across the region has improved on last year's
low levels but remains well below historical averages, as my
colleague John Kemp wrote in a recent column. 
    Droughts in consecutive years will severely deplete
reservoir levels and constrain generation across a part of China
that accounts for almost 80% of the country's hydro power
generation capacity.  
    That has major ramifications for China's ambition to wean
itself off coal, still a dominant source of power in many
provinces. 
    It's also a big headache for local aluminium producers who
must factor the weather into their operating plans. 
    However, in light of the rush to produce low-carbon
aluminium, Chinese operators are still planning to shift even
more capacity to Yunnan. 
    China Hongqiao Group  1378.HK , the world's largest private
operator, is looking to move two million tons of capacity from
the province of Shandong by the end of this year and four
million tons by the end of 2025.
    The move will slash the group's carbon emissions by 30% this
year while moving more capacity to Yunnan will allow it to hit
peak carbon in 2025.
    
    RAIN CAP
    But can Yunnan's hydroelectric system handle this additional
capacity, given it is already struggling to balance loads
between household and industrial demand?  
    The combination of more primary smelting capacity and less
rainfall in Yunnan suggests seasonal curtailments are going to
become a recurring pattern.
    And an increasingly significant one as ever more Chinese
aluminium capacity migrates from north to south to lower the
carbon footprint. 
    China may be close to the government's capacity cap, but it
is becoming clear that it can only operate at peak run-rates for
a few summer months. 
    Rainfall in Yunnan is now the key determinant of China's
primary aluminium production capacity. 
    
    The opinions expressed here are those of the author, a
columnist for Reuters.
    

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Another month, another fresh production record for China's
aluminium smelters    https://tmsnrt.rs/3QmFads
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 (Editing by Paul Simao)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))