Last week, we visited 4 aluminium smelters and one carbon plant in Xinjiang.

When the taxi just crossed the border of downtown in Wulumuqi (Editor’s note: Urumqi in English - Wulumuqi is the Chinese version of the city’s name), the capital of Xinjiang Province, we were shocked that the traffic was even heavier than in Beijing. Due to road maintenance, only one way is available to go through downtown which we were told normally takes more than 1 hour. We were “fortunate” to experience the heavy traffic each evening in order to return to our hotel.

Similar to other capital cities in China, Wulumuqi looks good from the outside and you can see that the local economy is burgeoning. The State government is busy pursuing investment to improve GDP growth by offering cheaper energy or other forms of preferential policy, but VAT refund is excluded.

The 4 smelters we visited were located in three separate industrial parks, and are all giants in the industry with a typical design capacity of 1.6 million tpy and one with 2.4 million tpy. Captured power plants, anode plants and downstream processing mills are included in each project to take advantage of the cheaper coal, natural gas and benefit of circular economy. All of them entirely or partly adopt advanced Chinese technology, such as 500KA potlines designed by SAMI. Wind turbines are pervasive there, replacing water cooling towers to deal with the lack of water. So far all of them are operating smoothly and also busy working on sequential construction of their Phase II, III.

Everybody is seeing an apparent aluminium boom in Xinjiang, but who is thinking about the underlying issues there?

1. Unsustainable policy

Most companies invested in Xinjiang were promised by the local government that they would benefit from preferential policy but at least one confirmed they were cheated. This company invested there on the premise that the local government guaranteed natural gas supply with a very low cost, but after they invested there the government ate their words.

Another interesting story we heard was about overhearing two government officials chatting. One man was concerned that it was immoral to persuade companies to invest and then cheat them, but the other said, no matter what way you choose, the first priority is getting them to invest here.

Due to the unsustainable policy, CPIC finally decided to suspend their investment plan in Yili, Xinjiang.

2. Transportation and climate limitation

The distance from Xinjiang to the central and east coastline is extremely long which means large amounts of freight will be wasted. This freight will largely offset the savings from cheap energy. Other costs also stem from this limitation. For instance, one smelter who doesn’t have a captured anode plant is now facing a big headache on dealing with butts. Without recycling butts, the carbon cost is quite high.

Limited transportation facilities is another severe problem smelters there have to face. As a large amount of fruit is transported via railway, especially during harvest time, no railway station likes to discharge dirty petcoke or other carbon products which could contaminate food.

The freezing winter is another shortcoming of Xinjiang. During winter, protecting anodes from cracking will definitely become a major concern. However, after a captured anode plant is built up, this risk will reduce.

Considering the above issues, we will probably see seasonal fluctuations on both aluminium price and carbon price. For instance, aluminium transportation will be suspended during harvest time. After then, large amounts of aluminum destocking will surely impact the market. Smelters have to stock up from early August to prepare for winter. We may see intense demand during that period which will drag up the carbon price.

3. Unwillingness to have long-term operations

We heard some holding companies are also sniffing the opportunity in Xinjiang to invest in the industry. However, they were much more concerned about capital returns rather than long-term operations in Xinjiang. One of them who is setting up a smelter is seeking a partner to build captured anode plants without spending more money. Companies with aluminium background may have a better contribution to this industry than those just trying to make a buck.

Xinjiang’s debut is the icon of structural reform in the Chinese aluminium industry. This will absolutely lead a campaign on optimizing the resource allocation. However, unbalanced economic structure and external limitations are telling us that the Chinese aluminium industry has a long way to go.