What pushed up the aluminum price this week?

Aluminum prices have performed meekly since May, as we entered the low season for demand. The average SHFE active price bounced around RMB13714 in the first half of June.

But the price suddenly rebounded and hiked to RMB13995 on June 20th. What caused the price rise and how long will it last?

On June 15th, the NDRC, NEA (National Energy Administration) jointly working with MIIT, Ministration of Finance, and MEP announced they would carry out special supervision on construction and operation of on captive coal-fired power plants start at the end of June.

NDRC and NEA gave a notice called Circular on Supervision and Construction of Coal Fired Self Owned Power Plants and Supervision on Operation and Transformation. The selected on-site investigations include Xinjiang, Inner Mongolia, Gansu, Guangxi, Jiangsu and Shandong.

The inspections will cover three areas:

1. The planning and layout, operation and approval departments, the basis for approval, the licensing situation of the captive power plants in each province. Whether there is no approved construction; whether the approved construction does not match approval; whether the public power plant switched to self-imposed power plant illegally, and whether start construction when they do not meet the start conditions such as illegal construction and operation.

2. Whether captive coal power plant commitment to social responsibility. It means whether they have paid the money they should pay. It includes: whether to pay government funds and additional, policy cross-subsidy, system reserve costs and payment standards, payment time; reasons why unpaid, missed payment, less payment amount, start time.

3. Coal-fired power plant discharge standards. It means how to implement environmental emissions standards.

It includes whether the level of energy efficiency and pollutant discharge meet the relevant requirements and standards of the State; whether there is a super standard super-total emissions, whether the implementation of energy conservation, environmental protection, and elimination of backward production capacity and so on.

The inspectorate team will do in-depth on site view through random sampling or unannounced visits. There will be no less than 3 enterprises will be inspected in each province.

In China’s aluminum industry, lower power cost is the advantages for many smelters. In around 107 smelters in China, more than half of them have captive power plants. Calculated by operating capacity, around 82% of China’s aluminum capacity uses captive power plants. The average power cost for smelters with captive power plant is around RMB0.3/KWH. For those who do not have the captive power plant, the power cost will be higher and around RMB0.35/KWH in average.

We can see the importance of captive coal power plant to aluminum production cost structure for smelters.

In the aluminum production cycle, typically more pollution is generated at the power station than at the smelter. The inspections on major aluminum production provinces such as Shandong, Inner Mongolia, Xinjiang, and Guangxi will have some impact on the smelters. NDRC did not say how they will punish the captive power plants with problems, but because the edict mentions fees we wonder if a financial penalty will be imposed instead of shutting plants down. However, extra charges will increase the production cost for the aluminum industry.

There is other news which influence the aluminum market beside this one.

In order to further improve the national pollutant discharge standards, China MEP decided to amend the “aluminum industry pollutant discharge standards” (GB 25465-2010), while revising “renewable copper, aluminum, lead, zinc industrial pollutant discharge standards” (GB31574-2015). It had more emissions control measures.

On June 13th, MEP published the standard amendment as a draft for publication. They will collect opinions by June 22nd. The new emission standards will be implemented from 2017 October 1^st in Beijing-Tianjin-Hebei 26+2 urban areas within the bauxite mine, alumina plant, electrolytic aluminum plant, recycled aluminum and other enterprises.

Aluminum industry’s emissions focus on mining, alumina production, electrolytic aluminum production, followed by material storage and transportation links.

In the new “Aluminum Industry Pollutant Discharge Standard” revision (draft), it gave emission control detail measures to the aluminum industry for their production process. The modification also requires that other effective pollution control measures may be taken with the approval of the competent environmental protection authority due to the safety requirements or special process requirements that can not meet the requirements of the emission control as stipulated in this standard.

This new aluminum discharge standard, plus last week’s Notice on the Implementation of Special Emission Limits for Air Pollutants in Beijing, Tianjin and the Surrounding Areas will surely increase more pressure to aluminum industry.

On June 19^th, Xinjiang NDRC announced the special action on controlling illegal aluminum capacity in the period from June 20^th to 25^th. Since the second step of the NDRC’s aluminum illegal capacity check calls for local government checks with a deadline of June 30^th, the local Xinjiang NDRC’s new document simply follows the order from top government. only Jiarun smelter has cut around 20Kt capacity in the time since the first announcement. How much Xinjiang will do in a week to meet the requirement from top government is questionable. In the meantime, we saw the aluminum price rebounded on Monday influenced by this news.

On June 20^th, Weiqiao (known as Hongqiao) announced to cut 250Kt aluminum capacity. The cut capacity was mostly from its 240KA pots. It further increased the market sentiment. Aluminum price soon surged by the speculations on the day.

How serious the government will take actions on the captive power plant and what punishment MEP will gave to smelters broke aluminum discharge standard remains unknown yet. In the meantime, whether Weiqiao will truly cut its capacity is still to be seen. Aluminum demand remained soft in the low season. Without the solid support, it is hard to see the aluminum price will remain strong for longer term.

Picture Reference: https://www.nephrologynews.com/nraa-sends-letter-to-cms-addressing-price-increase-of-amgens-epogen/