Category Archives: energy
Dear readers, our latest “Weekly Report Review” has been published. if you have any questions, please tell us. Thanks!
Energy
Iraq tensions drove oil price up sharply last week. But domestic coal prices remain stable. Although coal consumption is increasing in summer, but potential negative factors continued to work, especially high level stock and decreasing ship transport fee.
AL
Compared with increasing spot alumina price, limited trade volumes of imported alumina continued to suppress prices, which still remain at a low level. However, aluminium prices continued to climb slightly.
Raw material of AL
After a adjustment in petcoke prices, last week both anode and fuel grade coke prices remained stable. But for anodes, because of long term weak demand and reducing exports, anode prices declined last week.
For other product, ALF3 rose further last week due to the low level inventory. The total aluminum fluoride stocks held by the 17 main plants decreased by compared with April.
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Romanian aluminium company Alro reported a net loss of RON 51 Million (US$15.9M) for the first quarter of 2014. Processed aluminium production increased to 20kt, a 7% increase from 12 months ago. Output of primary aluminium was roughly the same as last Q1.
Although they reduced electricity consumption, the saving could not balance increasing costs and decreased metal price.
Electricity was the major cost. The electricity consumption rate of Alro is about 13,160kwh. However, we estimate their electricity price of 2013 was in the range of $85/Mwh due to additional cost of carbon permits. What does this electricity price mean? Only 30 primary aluminium smelters’ electricity prices in China are in this range, and the corresponding average price of Xinjiang province reaches $32/Mwh) at present.
Relying on the global market was another reason for their troubles. Alro exported about 60% of production to the global market and 80% of that was traded via LME, therefore the LME price had a big impact on company revenue of aluminium section. The average spot price of 2014Q1 decreased to $1,717/t from previous quarter of $1,742/t. Even if Alro improved sales of both primary aluminium and proceeded aluminium products, they still could not offset the losses.
Among their competitors, including Alcoa, Hydro, Dubai, Alba and others, the market will be more challenging for Alro. There are reports they are now planning for partial curtailments to cut energy consumption. Producing more processed products may be a way to relieve stress, but metal price rebound and EU demand recovery are essential for their future.
Following Beijing’s guidelines about tiered pricing for China’s aluminium industry, some local governments have published and started to conduct local implementation plans. Although we expect limited impact on the industry, which we posted in another blog, the implementation plans can promote industry upgrading to a certain degree.
Shandong province, with aluminium capacity of about 5.6 million tonnes, issued a notice that the local government will collect the data of volumes of liquid aluminium and corresponding electricity consumption annually, to determine AC consumption and relevant electricity pricing. Hubei province, with current aluminium capacity of 378kt, has issued a similar notice. Gansu province started to implement the central government’s guideline as well. At the same time they asked all local authorities to find the best ways to support local enterprises’ technical upgrading and reduce electricity charges. Urumqi government issued a notice on tiered pricing. In Urumqi’s case, they have allowed for 90% of the increased cost to be returned to smelters in the form of funding for technical upgrades, to reduce electricity consumption.
We will keep watching on the individual smelters’ electricity payment standards which should be published soon on local government’s official websites. If the local extra electricity charges are used on enterprises’ upgrading, it is a positive for sure. But it still loads smelters with additional cost, at a time when market prices are low, and gives them funding that doesn’t help them in the short term.
It is also worth noting how the local governments go about checking electricity consumption. There is a huge team of technical and accounting experts who are assigned to each smelter. This team conducts almost a full audit of the plant, stripping out downstream electricity consumption, and examining a year’s worth of pot performance data and other operating characteristics. The finished audit will be a treasure trove of performance data.
China’s electricity consumption reached 5.32 trillion Kwh in 2013, up 7.5% y/y, according to the National Energy Association.
Year 2013 was difficult for the aluminium industry in China. Not only the sagging metal prices, but the government published all sorts of regulations and guidelines to resolve overcapacity issues of several heavy industries, including aluminium. Yet, using IAI’s data to the end of November, and assuming December’s production is similar to November, it looks like China will finish 2013 with a production of 24.5 million tonnes, for a growth rate of 10%. Aluminium supply is growing faster than electricity supply.
According to government data, China’s aluminium industry was consuming electricity at a rate of 13,762 Kwh/T AL in 2013, down from 13,844 Kwh/T AL. If we do the maths, it means that China’s primary metal production consumed 337 billion Kwh of electricity in 2013, or about 6% of all of China’s electricity.
In fact, this ratio is down somewhat from 3-4 years ago. At the peak of the expansion of all those smelters a few years ago, China’s aluminium industry was consuming about 10% of China’s electricity. To be down 4 points when the primary metal industry has grown consistently at around 10% per year, speaks of the huge rate of growth in generation.
We will do a little research and compare China’s 6% of electricity to the rate in other countries, and give you the results in another blog post.
The theme for our upcoming conference is “2020 Vision - Aluminium Outlook”, and when it comes to electricity, it’s a vital question. Where will the electricity come from?
We spend a lot of time in this blog and in our briefing notes and reports talking about the cost of electricity in China, but have you stopped to consider what the energy profile will be in 6 years time?
According to a report published in the Sinograduate website (link here), China will have 29 new nuclear power plants in operation by 2020, on top of the 20 plants it already has, for a total generating capacity of 58 GWe. According to the article, an expansion rate such as this has not been seen since the USA in the 1970s and France in the 1980s.
But what about the lessons learned from the Fukushima accident? China imposed a moratorium on development of nuclear power plants following the accident, especially inland projects. Where China will now have 41 GWe of new capacity by 2020, prior to the accident the plan had been to add 70 GWe.
Still, coal will continue to be the major source of electricity even out to the year 2020. Presently, nuclear power represents just 2% of China’s electricity profile, and even the aggressive construction planned for the rest of this decade will be matched by the construction of coal-fired capacity in the same period, leaving nuclear electricity as still only 3-4% of the total profile.
Reuters yesterday published an article saying that China’s National Development and Reform Commission (NDRC) is set to impose new power tariffs on China’s aluminium industry.
Power prices will remain unchanged for smelters that do not use more than 13,700 kilowatts (KWs) for each tonne of aluminium produced, while those that use between 13,700-13,800 KWs will be charged an additional 0.02 yuan per KW, the National Development and Reform Commission (NDRC) said in a statement.
Smelters that consume more than 13,800 KWs of power for each tonne of aluminium produced will be charged an additional 0.08 yuan per KW, the NDRC said.
Plants that exceed the 13,700 KWs/tonne threshold will also be barred from direct negotiations with power companies for lower energy prices. (Acknowledgement to Reuters)
There’s no doubt this announcement, or more correctly the Reuters report about the announcement, will bring out those commentators who will predict further upheaval to the aluminium industry in China. But the problem is, there are some factual holes in the story, and in the edict. More information will be provided to our clients in a Client Briefing Note. If you are currently not a client, contact enquiries@az-china.com.
There’s a revolution going on in the North America crude oil market, and it is set to send shock waves all the way to the anode.
But how to keep up with the latest developments? How to sort all the good information from the bad? How to identify how it will affect you?
AZ China is pleased to announce a new comprehensive service that gives you the handle you need on the ongoing saga of Shale Oil and Tight Oil. The Crude Revolution is not just a report, not just a blog, not just a news aggregation service. It is all of those and more.
The Crude Revolution Monitor (available Dec. 20, 2013) starts you off with a complete run-down of the situation regarding developments in Shale Oil and tight Oil generally. What is happening in the oil fields themselves, especially as well life diminishes? How will the pipeline v. rail logistics roll out affect the adoption of shale oil? To what extent have oil refineries already taken up shale oil and tight oil in their blends? How has this affected petcoke volumes and quality? How are the calciners affected, and what are they doing about it? Plus many other subject areas.
That gives you the starting point, but AZ China will give you so much more. Each month, we will send you the latest updates, together with a commentary on the expected developments to come. And we also give you exclusive access to our Crude Revolution blog site, where we will bring you the latest news as it occurs. The blog will also feature opinion pieces from experts in the field.
There is plenty of information out there about shale oil, but AZ China’s Crude Revolution Monitor is the only place to find out how shale oil affects petcoke and the supply of carbon to the world’s aluminium industry. Contact enquiries@az-china.com for more details.
The recent announcement from the NDRC on making adjustments to the Chinese fuel price pricing system, aims to bring flexibility to the market. The move potentially benefits Chinese refineries, as it let loose the domestic fuel price, allowing it to move more in sync with the international crude oil price. While this is a step towards further market liberalization in the domestic energy market, it is likely to impact on downstream industries by creating more volatility in energy price.
The Chinese energy pricing mechanism puts refineries in an awkward position, in between a volatile international energy market, which is prone to supply side shocks; and a relatively fixed regime of domestic fuel price setting. Before the new adjustments, the domestic fuel price could only move on a 22 day frequency; a stringent requirement of a 4% price move in those 22 days triggered a price adjustment at the end of the cycle. Anything short of a 4% move would not qualify.
This ultimately created a misalignment between the input cost and the selling price for the refineries. If the input cost rises substantially due to supply side or even demand side shocks during the 22-day cycle, the refinery is negatively hit, since their selling price has remained the same during that time. Therefore, a reduction of the 22-day cycle to 10 days allows pricing in the domestic market to be more efficient, because it reflects the real input price; and this is greatly helped by the scrapping of the 4% rule. The 4% rule has historically seen refineries operate without any price change for as long as months. The 10-day system however allows a rolling or moving average of the real price.
The new system will bring more volatility to the domestic fuel price, thanks to a wider range of price movements. After a preliminary look at the numbers, the difference between the old 22-day 4% system and the new 10-day system can generate up to -62RMB in downturns and 78.4RMB during upturns. This is essentially saying volatility increases when the new system is introduced and the impact can be quite substantial. It also means the buyers of refined oil in China will need to factor in these wider ranges of fuel price movements. Because the duration of price adjustment is shortened, the spot is more volatile and it does not have much of an impact on the long run direction of the price.
The price adjustment better reflects the international crude market, especially in times of shocks or sharp price changes. This is a reduction of the refineries’ risks and a passing on of those risks onto the downstream buyers.
It is helpful to understand that the Chinese CPI does not directly measure the energy price in its basket; therefore, the volatility will not be reflected quickly in the CPI. Because the greater volatility operates on a shorter duration and does not affect the price evolution in any real way, we expect the new system to add to volatility but not to structural inflation. However, we may see the rollout of a core inflation measure from the NBS in the future.
Structurally, or perhaps philosophically, the move to a more liberal pricing system for one form of energy begs the question, what other markets might be reformed? Petroleum and other refined oil products being so crucial to the Chinese economy, it is a remarkable place to start a reform process, but perhaps also one where reform was most needed. If this new system proves itself to be successful, we may see other markets subjected to a liberalisation - namely the electricity market, and perhaps even the coal market. But no doubt the authorities will wait to see how this reform works first.
The Aluminerie Alouette (AA) sustainable development report of 2011 became available in October. In the report, AA states its world class production technology has a carbon consumption of 12,744Kwh/t. With an annual capacity of 600,000 tonnes, it is the largest aluminium smelter in North America.
As with any smelter, optimizing use of electricity to create cost savings and improve efficiency is paramount. Most of the power used at AA is generated by hydroelectricity. Between 1995 and 2000, AA reduced energy consumption by 7%, while boosting production by 12%. AA uses approximately 13,000Kwh of power (DC) per kilogram of aluminium, this puts the company in the industry’s “best performing” list.
However, AA is not the only company striving for technological excellence, other companies, particularly companies in China are making waves. Hunan Shengtong Group announced in May 2012, the company achieved major developments in aluminium electrolysis technology after just 3 years of research. The successful project reduces electricity consumption down to 11,992 Kwh per tonne of aluminium produced. This is a 1,222Kwh/t saving compared to other electrolyzers. If everyone were to reduce electricity consumption at similar rates, the industry could slash 19.68bn Kwh/yr; this translates to 6.87Mt of coal saving and a reduction of 17.9Mt of greenhouse gas emissions annually.
The ‘made-in-China’ norm is changing. Chinese companies are improving their performance and abilities and are contributing to overall industrial improvements around the globe. As a result, AA will need to have even higher benchmarks; however, that is precisely the right move – constant improvements in processes and systems through benchmarking and technological advances.
(Source: Alouette Company Website & Shengtong Group website)
With all the flak China gets from the RoW about various political, social and environmental issues, there is one thing no one can debate – China knows how to get a message across to the masses. Although predominately known for being opaque in many ways, China speaks quite loudly and frequently whenever they undertake projects that should improve their image (as any good country’s PR team should do). The message of late is that China is serious about using wind power to make electricity.
According to the Energy Research Institute and noted by a Caixin article here, wind power is going to meet 17 percent of China’s electricity demand by 2050. This would mean an installed wind power capacity of 1 billion kilowatts. A friend recently noted that China truly is walking the talk when it comes to using wind energy as evidenced by the multitudes of turbine blades being trucked out west near Gansu. Most other countries promote their clean energy in words only, shying away from the high capital cost (a single 1.5-megawatt turbine costs 12 million yuan - US$1.8 million) and rather shifty wind supply in favor of more dependable and traditional means of power generation. Some estimate over 35,000 turbines already call China home. And China, never one to build with hesitation when it comes to infrastructure projects, will invest another 12 trillion yuan in capturing even more wind over the next forty years. But this supply isn’t being driven by market demand; it’s entirely propped up on government subsidies.
As reporter Lu Zhenhua noted in an article on the same topic “limitless winds do not translate into limitless profits”. Countless Chinese wind farms have yet to turn a profit, but who needs profits when the majority of China’s wind-power capacity is funded and operated by state-owned power companies. The only thing these companies worry about is meeting the government’s renewable-energy capacity targets. What does all this have to do with aluminium? For now, nothing. Wind variability makes it a completely unacceptable option for powering aluminium smelters. Although, back in January, Alcoa and China Power stated they would invest $7.5 billion of clean-energy and smelting projects to develop wind- and solar-energy projects in the next few years. Sounds good to those of us who are tree-huggers, but until the inconsistent supply of wind can be managed, smelters will continue using more reliable sources.
The wind energy industry has a ways to go in terms of development and efficiency, but this is contrary to what we’re hearing in China. Funny how no one is ever too keen to nay-say a national priority. Thus, for the time being, it’s everyone on the turbine bandwagon. And why not - as long as the government continues to subsidize the entire industry. China is confident that wind power can achieve commercial viability within 8 years. At that magical moment in 2020, the costs of wind-generated electricity at prime sites (side note: onshore prime sites appear to be dwindling) will instantly become on par with costs for coal-fired power. Nothing wrong with optimism, but thousands of turbines have yet to be connected to the grid due to limited system flexibility.
Just how long will it take China to replace the old system with a smarter electricity grid while at the same time minimizing west-to-east energy transportation costs? The answer lies in the successful implementation of cross-country ultra-high-voltage transmission lines. A large chunk of China’s upcoming grid investments will be made in these transmission lines (a fine time to invest in China’s power equipment manufacturers!) which use aluminium alloy as the primary conductor material. When it’s all said and done, developments in any of the energy industries have a varying degree of affect on the aluminium industry making even hot air a topic of interest for us.
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