Aluminum May Advance as China Ends Discounted Power

Aluminum may climb as China, the world’s largest producer, ended discounted power rates to high- usage companies as part of the country’s efforts to conserve energy and resources.

“The cost of producing aluminum will increase and this is bullish for aluminum prices,” Li Yang, an analyst at state- owned researcher Beijing Antaike Information Development Co., said in a phone interview today. Energy represents as much as half the cost of making the metal used in cars, cans and airplanes.

China stopped selling electricity at discounts to high- consumption companies with immediate effect, the National Development and Reform Commission said in a statement yesterday, and the government will impose financial penalties on companies whose power consumption exceeds state-set limits. Users affected by the policy change include makers of aluminum and ferroalloy.

Aluminum for three-month delivery has dropped 3.7 percent on the London Metal Exchange this year as supplies outpaced demand. The metal declined 1 percent to $2,148 a metric ton at 3:35 p.m. in Singapore, while prices on the Shanghai Futures Exchange ended the day at 15,815 yuan ($2,317) a ton, down 9.1 percent this year.

“Higher power prices will support aluminum prices but the gains will be limited because everyone can see how high domestic stockpiles are at the moment,” Wan Ling, a senior consultant at CRU International Ltd., said by phone from Beijing.

Stockpile Jump

Inventories of aluminum in warehouses monitored by the Shanghai Futures Exchange have jumped 61 percent this year as Chinese smelters ramped up production on expectations that demand will improve as the global economy recovers.

“It’s too soon to ascertain exactly how much smelting capacity will be affected by the increase in power prices,” said CRU’s Wan. “It probably won’t be much because the high power consumption smelters make up only a small portion of total production capacity.”

Higher production costs and weak aluminum prices may force smaller smelters to cut production in the second half, said Eric Zhang, an analyst at Shanghai Metals Market, a unit of CBI China Co., said in an e-mailed report today. In Henan, China’s largest producing province, power rates at smelters have been raised by an average 460 yuan a ton since the end of April, he said.

China may add 2 million to 3 million tons of aluminum smelting capacity this year, according to the China Nonferrous Metals Industry Association.

“The profit margins of producers will definitely be affected,” said Antaike’s Li. “Producers will now have to look at their cost structure to see if it’s still profitable to operate, if they have to cut production or shut operations, or if they have to slow down their expansion plans.”

Shares of Aluminum Corp. of China, the country’s largest maker of the metal, lost 3.3 percent to HK$6.96 by 3:59 p.m. in Singapore, down 18.3 percent this year. The benchmark Hang Seng Index in Hong Kong dropped 1.2 percent.