China’s Costs of Aluminium Pulled Back from Highs on Lower Prices of Electricity and Raw & Auxiliary Materials

SHANGHAI, Dec 28 (SMM) – Most aluminium plants, especially those using in-house generated power, suffered losses from late October to November due to the surging electricity costs and high prices of raw and auxiliary materials. The shortage of thermal coal caused the costs of thermal power to soar, and the aluminium prices stood low in November, which further aggravated the losses.

The aluminium plants gained profits again in December as the prices of thermal coal, alumina, and other raw materials kept falling, and the production costs of aluminium dropped below 18,000 yuan/mt. The full cost of domestic raw materials of aluminium stood at around 18,195 yuan/mt in December, according to SMM calculation, 10.6% lower than November but 35% higher than January 2021. The average profit of domestic aluminium was 941 yuan/mt in December, an increase of 2,170 yuan/mt.

Electricity price: The electricity prices took up an increasing proportion in the total costs of aluminium, rising from 33% in January to 38%. The thermal coal prices dropped to a normal range recently, and the supply shortage was eased. The thermal-power costs declined, and cost pressure on some aluminium plants with in-house power generation facilities was lightened with lower priced coal. According to SMM survey, the electricity costs of the aluminium plants with in-house power generation facilities in Shandong fell to 0.42-0.49 yuan/KWH, and that in Inner Mongolia dropped significantly as well, because the local plants were related to people’s livelihood, and they received the low-priced coal supply . Some plants in Inner Mongolia had the electricity prices at 0.45 yuan/KWH. The thermal power costs in south-west China were relatively higher at 0.55-0.65 yuan/KWH. According to SMM calculation, the weighted average electricity price of domestic aluminium enterprises stood at 0.51 yuan/kwh in December, down 0.06 yuan/kwh on the month, but it was still higher than the 0.18 yuan/kwh in January.

Alumina: The alumina prices stood stable in H1 2021, and rose significantly in H2 amid higher costs and production cuts in Henan and Shanxi. The prices once reached 4,200 yuan/mt in October. The prices of caustic soda and thermal coal plunged at the end of October, and the alumina prices started to drop. The prices have fallen by about 20% on the month to 3,018 yuan/mt as of the time of this writing, but it was around 29% higher than the prices in January.

Prebaked anode: The domestic prices of prebaked anode kept rising from July 2020 to November 2021, mainly because the prices of petroleum coke and coal tar pitch frequently hit new highs.

The petroleum coke prices fell in November 2021, dragging down the domestic prebaked anode prices in December. The SMM average price of prebaked anode in December was 5,636 yuan/mt, down 4.7% from November but up 53% from January.

SMM believes that the manufacturing costs of domestic aluminium are unlikely to find a way out of the current high level when just taking into account the electricity costs, as the electricity prices for aluminium manufacturing will rise slightly in 2022. And the electricity costs with captive power plant will not necessarily be higher than that of power grid-distributed electricity mainly for two reasons. First, the coal prices have stabilised amid national intervention. Second, the electricity scheme is changing. It is mentioned in the National Development and Reform Commission’s Notice on Improving the Progressive Pricing for Electricity in the Aluminium Industry that, it is important to improve the progressive pricing of electricity (the standard after 2023 is more challenging for aluminium enterprises), to strictly prohibit the introduction of preferential tariff policy (at present, the preferential tariff is mainly found in Yunnan, Sichuan, Chongqing, Gansu, Qinghai and Guangxi; if the preferential tariff is removed, the costs in Yunnan (new capacity) will rise by 900-1300 yuan/mt, and will increase by 130-390 yuan/mt in Sichuan, Qinghai and other places), to strengthen the management of captive power plants (in strict accordance with the relevant provisions, the aluminium enterprises’ captive power plants will be charged with the corresponding government funds and surcharges, system backup fees and policy cross-subsidies, which may have a greater impact on the cash flow of enterprises).

The alumina market is likely to maintain a tight balance in 2022, and the prices may move around the breakeven point. The prices of other auxiliary materials are expected to fluctuate rangebound in Q1, 2022. In general, the electricity prices will be the leading factor to determine the cost orientation of domestic aluminium. The domestic aluminium costs are estimated at 17,000-18,500 yuan/mt in the first quarter of 2022. The aluminium smelters with a relative integrated industry chain will hold the cost advantage.