SHANGHAI, Dec. 2 (SMM) -- The National Development and Reform Commission (NDRC) announced November 30th that it will raise the on-grid and retail prices for electricity, with retail electricity prices rising by an average of RMB 0.03 per kilowatt-hour (kwh) nationwide starting December 1st. SMM believes the higher electricity prices will directly push up production costs at aluminum producers, improving market expectations of higher aluminum prices.

China hiking electricity prices aimed at easing power shortages and reducing financial pressure on power companies. The coal prices in China are market-oriented while the government sets the price of electricity, so many coal-fired power plants operated at a loss because of the on-going increase of coal prices in 2011, and operating rates at some coal-fired power plants were low and generated less electricity as a result. Guangxi and Guizhou faced power shortages since 3Q 2011, prompting the Chinese government to consider raising electricity prices to reduce pressure on profit margins at power plants and to encourage them to boost generation.

SMM believes higher electricity prices will exert effect on aluminum producers. As per mt of aluminum consumes 14,000 kwh of electricity on average, China hiking retail electricity prices by RMB 0.03/kwh means that aluminum costs will directly rise by RMB 420/mt. SMM sources report that actual aluminum costs may not increase by RMB 420/mt, since many domestic aluminum producers have their own power plants and they are not affected by the electricity price hike.

For example, 50% of aluminum producers in Henan Province have power plants, with electricity prices generally between RMB 0.52-0.53/kwh. Aluminum producers who have no power plants will be affected by the electricity price hike, and their electricity prices are currently between RMB 0.62-0.64/mt, with electricity prices for some aluminum producers have been raised. As a result, the electricity price rise will exert mixed impact on aluminum costs.

In summary, although the NDRC raising electricity prices directly push aluminum costs, the actual effect will be limited. However, higher aluminum costs caused by the electricity price hike are improving market expectations of aluminum price increase, which may be favorable for aluminum prices.