Higher power costs to buoy aluminium prices

SHANGHAI, Mar 29 (SMM) – Aluminium prices are likely to gain some support in the mid term from higher power costs as China plans to regulate captive power plants at aluminium producers, SMM expects.

To cut capacity of thermal power, the National Development and Reform Commission (NDRC) issued The Regulation Scheme for Coal-fired Self-supply Power Plants for public comment. The measure requires power plants to pay governmental funds, surcharges and costs for back-up power systems by the end of 2018. Those that fail to pay on time will not be allowed to enter the power market.

Such fees are likely to drive up costs of production and erode profits as self-supplying power accounts for over 70% of overall costs in aluminum production. In addition, the commissioning of newly-added aluminium capacities may slow down due to the suspension at power plants under construction which did not have required permits.

From the end of 2018, the measure is likely to last for a minimum of three years. As it is expected to drive up the overall power costs in the aluminium industry and flatten the cost curve, there would be fewer lower-cost producers. 

Meanwhile, SMM does not expect sharp declines in production from higher-cost producers as these capacities mainly rely on grid power.

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