Smelters using captive power and grid power

China’s domestic coal price rebounded strongly last year as production limitations caused some shortages.  China’s aluminum industry as a major power consumer has to consider the impact of rising coal prices on the cost pf making aluminum.  As we wrote in the briefing note about Q4 cash cost curve, along with aluminium prices falling and cost rising, average profit of smelters has tumbled to a critical point. In this post, we review the relative impact on smelters with captive power compared to those who use grid power.

Only considering power price, although prices of coal increased sharply in 2016, average prices are still lower than the same period of 2015, because almost all of them received subsidy from local government in the tough period from Q4 of 2015 to 2016 Q2. These smelters mainly located in Qinghai, Guizhou and Sichuan province – none of which are named in the recent MEP draft regulation.  Total capacity of smelters using grid power accounted for only 17% of the total aluminum capacity.

Chart 1







The vast majority of capacity uses captive power, and enjoy a better cash cost than those who are tied to the grid.

chart 2

However, although spot price of aluminium by now again went up to RMB13,600/t, pressure resulting from inventory surge has made market sentiment to be pessimistic. We expect the metal price to be weaker, but the coal price has decreased gradually after the winter demand peak.  We think power costs will ease, but the total cost of metal will continue to support strong metal prices.

Subscribers to our World Aluminum Monthly report will get more information on these curves and the reasons behind the differences in captive power versus grid power.   If you are not already a subscriber, contact us now.