Beijing energy reforms spurring aluminium output
Date: 04-Sep-02
Country: CHINA
Author: Nao Nakanishi
China has already flooded the world with cheap aluminium, an energy-intensive light metal that the country was importing in large quantities only two years ago.
Despite its high energy prices and restrictions on imports of alumina, the raw material for aluminium, China has raised output of the metal by almost 50 percent over the past two years, deepening gloom in a market already wrestling with the world economic slowdown and stocks at seven-year highs.
"We are quite worried," said a trader at an international house. "The power prices could drop in future. And if that happens, that would again encourage more production in China."
The government is expected to order some state-owned power plants to cut their prices and to compete with each other as the country shapes up for tougher international competition following its entry into the World Trade Organisation (WTO).
China will churn out 4.1 million tonnes of aluminium this year, up from about 2.8 million tonnes in 2000. By the middle of the decade, China's annual aluminium production is expected to hit 6.2 million tonnes.
On the London Metal Exchange aluminium now trades barely above $1,300 per tonne, compared with more than $1,400 a year ago and above $1,600 two years ago.
With its domestic demand estimated at around 3.3 million tonnes, China is set to export at least 500,000 - about a quarter of annual demand in Japan, the world's third-largest consumer.
"We'll be net exporter of aluminium not only next year but until 2005 or 2006," said an analyst based in Beijing.
"The central government has just noticed the problem. But the smelters are already built. It cannot ask them to close."
COAL MINES, POWER GENERATORS
One reason for the recent rise in production is that many mini-smelters have expanded to escape a government policy of shutting down small plants.
Now companies from outside the sector are expected to build aluminium plants, too.
Last week three companies announced plans to construct or expand aluminium plants. They included China's top coal firm, Yankuang Group of Shangdong, which plans to build two new plants with a staggering combined annual capacity of some 500,000 tonnes.
An impending Chinese coal glut may lead to even more aluminium production, the traders and industry officials say.
The country will soon overtake the United States as the world's biggest coal producer but does not have the infrastructure to export all its surplus fuel.
The solution for the mining companies could be to use the coal themselves, by building power stations and perhaps even aluminium smelters. Even if they built only power plants, China would have more electricity available for aluminium production.
Downstream activities might also restore profits threatened by government reforms to the coal industry.
"It (coal output) has increased significantly...China needs energy. They don't want to buy more oil," said another industry official based in Beijing.
"But because of reforms on tariffs and reforms in the market for coal, they are not as protected as before...So if they want to be profitable, they need to go downstream."
The trader in Hong Kong agreed, adding: "The only practical (power) outlet on a large scale is the aluminium industry... One large-scale aluminium smelter can consume the equivalent of power of lighting up a city of 500,000 people."
CHINA CAN'T BEAT AUSTRALIA
So far, Beijing's efforts to close down small smelters to rein in pollution have had little success, because of support from local governments keen to receive taxes and to keep people in work, traders and industry officials say.
Even though China's cheap metal is making inroads in many Asian consuming countries, the industry experts say its small smelters cannot survive in the long term against competition from Australia, the region's top producer.
"The Chinese material is a threat to the area," the trader said. "But Australia has a much lower co
