Aluminum Prices in China May Rise on Power Gains, Essence Says

BEIJING, Nov. 23 -- Aluminum prices may rise in China, the world's largest producer, after the government increased power rates, which will spur Aluminum Corp. of China Ltd. and rivals to pass on the costs to users, said Essence Securities Co.

    The average 0.028 yuan per kilowatt-hour price gains starting today adds 400 yuan to the production cost of each ton, Heng Kun, an analyst, said by phone from Shanghai. The average output cost of a Chinese aluminum smelter is about 14,500 yuan a ton, he said.

    Aluminum price gains have lagged behind other base metals including copper as supply exceeds demand in China. Metal producers, which consume a fifth of the nation's power, are already struggling with the rising costs of raw materials and coal.

    "A rise in aluminum price will mitigate profit declines at aluminum smelters," said Heng. Prices my rise to about 15,500 yuan a ton on average in Shanghai next year, compared with 13,800 yuan this year, he said.

    Chalco, as Beijing-based Aluminum Corp. is known, dropped as much as 2.6 percent in Hong Kong and fell 2.2 percent to HK$8.55 at 10:52 a.m. local time. In Shanghai trading, the stock dropped 2 percent to 15.27 yuan.

    Aluminum futures in Shanghai gained as much as 1.3 percent and traded 0.5 percent higher at 15,625 yuan ($2,287) a ton at 10:10 a.m. local time. Prices have surged 36 percent this year as China's 4 trillion yuan stimulus spending increased demand for the metal used in car parts and packaging.

    Chalco Response

    "We are yet to know how this electricity price hike will apply in different provinces, so it's hard to estimate the total cost impact," said Zhang Qing, a spokeswoman at Chalco. The average power purchase price for Chalco's smelters is 0.381 yuan per kilowatt-hour, she said.

    The government earlier this year also decided to implement a program to allow the country's biggest aluminum producers to buy power directly from utility and grid companies to cut costs. Electricity accounts for about a third of the cost of making aluminum.

    Chalco has signed three separate agreements with power producers, Zhang said today, declining to give details.

    The company's plants in Fushun in the northeastern province of Liaoning, in Baotou in northern Inner Mongolia and Shandong provinces have signed direct purchase accords, which will reduce the rate by an average of between 0.04 and 0.06 yuan per kilowatt-hour, Essence's Heng said.

    Rates will be between 0.36 and 0.42 yuan a kilowatt-hour in those regions, he said.

    "The total power usage in those regions is relatively small, so there won't be a big impact on Chalco's overall operation," Heng said. "We expect talks to be more difficult in the future after the government raised power prices."

    (Source: Bloomberg)