SHANGHAI, Dec 24, 2010 (Dow Jones Commodities News via Comtex) -- Reduced power supply in China's Henan province due to a coal shortage may lead to delays in bringing idled aluminum capacity back online and add upward momentum to prices, industry participants said Friday.
Shanghai aluminum futures have rallied this month amid a broad rally in commodity markets that took copper to an all-time high and crude oil above $90 a barrel.
"Less power would mean less production as it requires a large amount of electricity to turn alumina to (galvanized) aluminum, so if the supply shortage of thermal coal isn't solved, it will very likely take longer for smelters to bring idled capacity back online," Galaxy Securities Futures aluminum analyst Sun Lei said.
Benchmark Shanghai Futures Exchange aluminum has gained 2.2% since the start of this month and closed at CNY16,760 a metric ton Thursday.
Electricity accounts for 40%-50% of the production cost of galvanized aluminum.
Energy-hungry aluminum smelters in Henan have received less electricity supply since midway through this month as a severe thermal coal shortage cut supply at local power plants, although those who have resumed production after the power rationing from August to November will be affected, industry participants said.
"As far as I know, only a small amount of idled capacity in Henan has been resumed, like some at (Henan) Zhongfu Industry, and most of the idled production remains inactive, so the impact is quite limited this time," a Beijing-based analyst with a major brokerage said.
Provincial governments around the country in August started power rationing to meet emission targets ahead of the end of China's 10th five-year plan and had idled 1.51 million tons of aluminum capacity by the end of November. Henan province, China's largest aluminum producing region, has idled around 800,000 tons during the same period, according to industry data.
An official at JiaoZuo WanFang Aluminum Manufacturing Co. (000612.SZ) said the company is still preparing to bring back online some of the 140,000 tons of aluminum capacity it idled in mid-October.
"Ideally, we plan to restart the capacity after the New Year holiday, but we don't have a specific timeframe," the official, who didn't wish to be named, said.
Postponing reactivating idled capacity will help boost domestic prices of aluminum into early next year, especially after the power rationing has helped offload high inventory in the oversupplied market, Sun added.
Spot aluminum stocks were down 10,000 tons from a week ago at 670,000 tons Friday, close to their levels at the beginning of the year, according to industry data. Stocks were around 1 million tons in mid-October.
A weekly Shanghai Futures Exchange stock report Friday showed aluminum stocks declined for a sixth consecutive week to 441,622 tons.