Green Shift to Unnerve Aluminium Sector in China
Noted columnist Mr Andy Home wrote in Reuters that volumes on the Shanghai Futures Exchange’s aluminium contract this month are already the highest since 2017 and market open interest is at record peaks. The surge in speculative activity follows the mandated curtailment of smelting capacity in the city of Baotou in Inner Mongolia, as the provincial government tries to meet its quarterly energy targets. The suspensions are small, at around 200,000 tonnes of annualised capacity, according to Citi analysts. That’s not going to make much physical market impact when China’s national aluminium output production surged by 8.4% in the first two months of the year. But the significance is the direction of travel. China is embarking on the road to decarbonisation, a journey that poses hard questions of a power-hungry sector such as aluminium smelting.
Inner Mongolia was one of three provinces which failed to meet targets on energy consumption and efficiency over the first three quarters of 2020. It is now preemptively mandating energy cuts to industrial users, including aluminium smelters. The measures are expected to be short-lived but there’s the distinct possibility of future rolling curtailments if quarterly targets are threatened.
Another province to fail the test was Ningxia, which has 1.2 million tonnes of aluminium smelter capacity. There has been no word of curtailments in Ningxia, but it’s a further warning that power consumption constraints are going to be a recurring theme in the Chinese aluminium sector.
According to the most recently available information from the International Aluminium Institute, China produced 36 million tonnes of primary aluminium in 2019 and used 484,342 gigawatt hours of energy to do so, 88% of which was derived from coal. The carbon footprint of primary aluminium can span a wide range from less than 5 tonnes of carbon equivalent for renewable energy such as hydro to more than 25 tonnes for coal.
There has been a significant relocation of capacity over the last two years to province, which boasts lots of green hydro power. But not everyone will be able to squeeze into hydro-rich provinces such as Yunnan and Sichuan. Most of China’s smelter sector is going to remain dependent on coal for its energy, which stores up trouble for a country now committed to carbon neutrality by 2060.