SMM Detailed Analysis of Aluminium Smelters’ Cost Changes in January and February

SHANGHAI, Feb 16 (SMM) – According to SMM data, the weighted full average cost of the domestic aluminium smelters in January 2023 was about 17,200 yuan/mt, a month-on-month decrease of 1.9% and a year-on-year increase of 8.3%. In January 2023, the average spot price of SMM A00 aluminium was recorded at 18,334 yuan/mt. The average profit of smelters in January decreased by 333 yuan/mt to 1,137 yuan/mt compared with December. In January, the domestic operating aluminium  capacity was about 40.29 million mt. Calculated based monthly average aluminium price, there was 4.44 million mt of aluminium capacity operating  in loss-making territory, which was mostly located in Henan, Guangxi and Guizhou where power prices are higher.

SMM data shows that by the end of January 2023, the domestic operating aluminium production capacity was about 40.29 million mt, of which 47.6% saw their full costs between 16,000-17,000 yuan/mt, and 2% operating at full costs of above 19,000 yuan/mt.

In January, smelters in Hubei, Xinjiang, Yunnan and Shandong enjoyed cost advantages. Taking Shandong as an example, local smelters mostly have captive power plants, and thus benefited from falling coal prices. Moreover, most local smelters also have captive alumina refineries, allowing their alumina costs to be 1,164 yuan/mt lower than their rivals in Xinjiang. High electricity prices still plague aluminium smelters in Henan, Liaoning, and south-west China. SMM estimates that the average electricity price of aluminium smelters across the country in January was about 0.44 yuan/kWh, while the average electricity price in Henan was about 0.6 yuan/kwh. As a result, power costs of smelters in Henan were 1,970 yuan/mt higher than the national average and 3,980 yuan/mt higher than in Xinjiang.

The main reason for the slight decline in the domestic aluminium cost in January is the slight decline in the electricity cost of smelters with captive power plants and the price drop in the prebaked anode and other auxiliary materials.

In terms of electricity, in January, the domestic coal market was weak. As of the end of January, the market price of 5,500 kcal coal in northern ports was 1,180-1,200 yuan/mt, versus 1,030-1,050 yuan/ for 5,000 kcal coal, and 920-930 yuan/mt for 4,500 kcal coal, a decrease of 20-30 yuan/mt compared with the end of December last year. However, in January, domestic hydropower costs and grid power tariffs saw limited fluctuations. And some areas even saw electricity prices rise due to reasons such as dry season and peak power consumption. Therefore, the electricity cost of aluminium nationwide smelters in January did not fluctuate much compared with December. According to SMM data, the average electricity price of smelters in January was about 0.44 yuan/kWh, a decrease of only 0.012 yuan/kWh from the previous month. Power accounts for about 34.1% of the total cost of the aluminium industry.

In terms of prebaked anodes, in January, the prebaked anode market ushered in a general decline. The benchmark price of prebaked anodes by an aluminium giant in Shandong in January was 6,580 yuan/mt, a decrease of 400 yuan/mt from the previous month. Prebaked anode accounts for 18.9% of smelters’ costs.

Alumina: Alcoa announced in early January that the production at its Kwinana alumina refinery in Australia would be cut by 30% due to natural gas shortages, affecting about 700,000 mt/year of capacity. This buoyed up overseas alumina prices.

 The roasting furnaces of some alumina refineries in Shanxi, Chongqing, and Hebei were unable to operate due to natural gas shortages, reducing the amount of alumina that was available in the market. This forced aluminium smelters in north-west China to source alumina from Henan and Guangxi at higher prices. The drop in domestic and overseas supply led to a slight rise in alumina prices in January. In January, the average alumina cost of smelters increased by 75 yuan/mt to 5,678 yuan/mt compared with December. Alumina accounts for 33.2% of smelters’ total costs.

Smelters with captive power plants will continue to benefit from decline in prices of imported and domestic coal in February and March, while grid power tariffs and hydropower prices may barely change. An aluminium giant in Shandong lowered its benchmark prebaked anode purchase prices by 660 yuan/mt MoM in February, which could reduce smelters’ prebaked anode cost by nearly 300 yuan/mt. Taken altogether, aluminium smelters’ costs may shrank to around 16,800 yuan/mt in February-March.