Aluminum Producers Face Production Cuts amid Big Loss

SHANGHAI, Dec. 23 (SMM) -- The National Development and Reform Commission (NDRC) announced to raise the retail price of electricity for non-residential use by an average of RMB 0.03/kwh nationwide starting December 1st, which directly pushed aluminum production costs up and increased losses at some aluminum producers, thereby forcing them to cut production.

SMM believes higher electricity prices threaten aluminum producers. It takes an average of 14,000 kwh of electricity to produce each ton of aluminum, with electricity costs accounting for about 42% of total aluminum costs. According to SMM sources, if aluminum producers who operate their own power plants are included, the RMB 0.03/kwh hike in electricity prices represents a direct increase in average domestic aluminum production costs of RMB 220/mt, bringing average costs at domestic aluminum producers to RMB 16,700/mt, but current spot aluminum prices are only about RMB 16,000/mt.

Increasing losses caused some aluminum producers in Central and Southwest China to consider cutting production. The scale of production cuts at aluminum producers in Southwest China where previously presented largest scale of production cuts due to power shortages expanded further, especially in Guangxi Province where operating rates at aluminum producers were only 35%. In addition, a small number of producers in Central China also began to cut production marginally.

As costs for production suspension and restart of electrolytic cells are high at aluminum producers, most producers are reluctant to cut production, generally adopting a wait-and-see attitude. But if aluminum prices remain weak, the scale of production cuts at aluminum producers will continue to expand in 1Q 2012.