Beijing Floating Aluminium Capacity Cuts to Combat Smog

Smog in Shanghai

Protection intended to fight air pollution was circulated among members of the China Nonferrous Industry Association. Deutsche Bank, citing the Chinese website Sina, said the proposed regulation, known formally as “2017 Air pollution prevention and control plan in Beijing, Tianjin, Hebei, and surrounding areas,” would reduce capacity in a region that houses over one third of the country’s aluminium smelting and over three quarters of its alumina refining.

This regulation would see the government halting up to thirty percent of capacity at certain smelters in Hebei, Shandong, Henan, and Shanxi provinces during the country’s next heating season, which stretches from November of this year to March of the next year. That percentage translates at present to roughly eleven million metric tons.

In addition, fully half of the alumina refining capacity and carbon anode production would be temporarily cut in Shandong, Henan, and Shanxi provinces. Such a cut would drop out 28 million metric tons, or forty percent, of the Middle Kingdom’s aluminium refining capacity. A loss of that amount of tonnage would see the country’s aluminium refineries facing shortages, which would likely put an even bigger dent in the nation’s smelting capacity.

The plan is crafted to cut out a portion of the industry’s coal-fired production at a time when the country’s air pollution is worst due to private and consumer coal-fired heating. However, the impact upon the aluminium industry’s production will likely be substantial. Overall numbers from SMM put the impact upon China’s aluminium industry into perspective. Shandong produces 11 million metric tons of aluminium per annum, Henan turns out 3.8 million metric tons, Shanxi is good for one million metric tons, and Hebei puts out 100 thousand metric tons in a year. Those four provinces account for 37% of the country’s total output of aluminium. Shandong refines 23.5 million metric tons of alumina per year, Henan produces 12.6 million metric tons, and Shanxi produces 20 million metric tons each year, combining to produce around 78% of the country’s total alumina output.

Assuming 2016 production levels, should the government put the proposed cuts into effect for the entirety of the heating season, China’s overall aluminium production would drop by 1.5 million metric tons, reducing yearly output by roughly four percent. Alumina production would be down by around nine million metric tons, a loss of fifteen percent of the country’s refining total.

Although this is far from being implemented, the potential side effects to China’s aluminium industry (and its overall economy) are significant enough to merit serious concern. Alumina refining is a major industry in Shandong, Henan, and Shanxi provinces, and a drop-off of fifty percent will have a substantial impact on many local economies. Additionally, China’s alumina utilization rate is in the neighborhood of ninety percent – there isn’t much product left over at current levels, so any significant loss from present production numbers can be counted upon to lead to drastic shortages at China’s smelters. Of course, the impact upon the bottom line of aluminium companies would be substantial as well. Estimates aren’t of much use due to likely price fluctuations in the event that this plan is implemented, but analysts from Citigroup project that the impact would do more damage to privately-owned China Hongqiao than to the state-run Chalco.

On the whole, the “hows” of this plan and its implementation is still murky at present. It is entirely possible that Beijing backs off, as restarting potlines is no cheap endeavor. According to researchers, the overall cost of stopping the capacity in question and restarting it once the plan has run its course is US$327 million. In addition, there is the risk that capacity shut down under this plan will simply be filled by capacity from other areas restarted in order to fill the vacuum and cash in on the situation.

Representatives of the relevant government ministries and of major public and private aluminium firms have been tight-lipped regarding the proposal according to press reports.

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