Explanation on SMM Low Carbon Aluminium Prices

Respectful users:

In order to fully reflect the domestic low-carbon aluminium market price, and demonstrate the supply and demand situation in the Chinese low-carbon aluminium market in an objective, true and timely manner, as well as discover the patterns of and reasons for the changes in the low-carbon aluminium benchmark price, so as to provide enterprises, research institutions and government departments in the low-carbon aluminium industry with reference in their scientific decision-making process, SMM has released the low-carbon aluminium benchmark price from December 27, 2021 for market reference after undertaking market research.

General Principles of SMM Price Methodology

Shanghai Metals Market (SMM) is a completely independent third-party service provider that does not participate in any substantive transaction, and maintains close communication with the buyer or seller of the transaction as a market observer or organiser, and provides relevant service to the market. SMM continuously develops, reviews and revises its methodology by communicating with industry insiders, using the most common product specifications and terms of trade in the industry. SMM attaches equal importance to normal transactions that meet the specifications and standards. SMM reserves the right to exclude from its price assessment any price data information deemed to be less reliable or unrepresentative.

SMM publishes spot metals prices (or indices, etc., including markets in China or outside of China) on a daily basis, commonly referred to as SMM prices. SMM has formulated corresponding methodologies for the published SMM prices, which have been published on SMM's official website www.smm.cn for reference. The methods and procedures for the formation and release of SMM prices are specified in these methodologies, and SMM prices are formed and released in strict accordance with the regulations of these methodologies.

In order to conform to the actual situation of the spot market, SMM will make necessary revisions to the SMM price methodology, and will announce it on the SMM official website www.smm.cn 28 days prior to the official implementation, unless there are special circumstances, especially force majeure (natural disasters, wars, bankruptcy of exchanges, etc.) that lead to shorter notice periods. If you have any questions or suggestions about the SMM price and its methodology, please contact the SMM customer service staff (please check the contact information on the SMM official website www.smm.cn). Please read this paragraph in conjunction with the SMM Methodology Review and Change Policy, and the SMM Complaint Policy.

This document specifies the standards and management methods for the SMM low-carbon aluminium benchmark price. The purpose of this standard is to establish a transparent and verifiable SMM price setting mechanism and provide market participants with an important pricing indicator.

Formation of SMM Low-Carbon Aluminium Benchmark Price

2.1 Definition, background and significance

Background for the release of the SMM Low-Carbon Aluminium Benchmark Price: With the deepening of China's carbon peak and carbon neutrality policies, China's aluminium industry has drawn much attention, and in the process of implementing the "dual carbon" policy, a low-carbon aluminium consumption market has already formed. Low-carbon aluminium is not a new word. With the deepening of the global understanding of carbon emissions, a consensus has been formed on low-carbon, green and sustainable development. The low-carbon aluminium market has emerged globally. Overseas aluminium smelters, such as Rusal, Alcoa and Hydro, have successively announced their own low-carbon aluminium brands. At the same time, in the aluminium downstream and end application fields, companies such as BMW, Mercedes-Benz, Tesla, and Apple, have successively required low-carbon certification for aluminium raw materials. Although the Chinese market started late, the Chinese aluminium is used in many end fields, such as construction, transportation, and packaging. The annual export volume of intermediate aluminium processing products has exceeded 5 million mt. Therefore, it is an inevitable trend for the Chinese enterprises to conform to the international rules. The good news is that China's low-carbon aluminium market has begun to be formed. According to SMM statistics, the annual capacity of aluminium smelters in Yunnan, Qinghai, Sichuan, and Chongqing, where hydropower is the main source of power, has exceeds 8 million mt. These smelters will become the first batch of suppliers of low-carbon aluminium in China. With the adjustment of power structure at the domestic aluminium smelters and the addition of green energy such as photovoltaics, wind energy, and bio energy, the scale of low-carbon aluminium in China is bound to continue to increase.

At this point, the market urgently needs a price that can fully reflect the domestic low-carbon aluminium market, so as to demonstrate the supply and demand of low-carbon aluminium in China in an objective, true and timely manner, hence the SMM low-carbon aluminium price has come into being. Through the analysis of this price, SMM has found out the patterns and reasons of the changes in low-carbon aluminium benchmark price, so as to provide a reference for the scientific decision-making by low-carbon aluminium suppliers, end consumers, research institutions, and government departments.

Definition:

The SMM low-carbon aluminium benchmark price is an indicative price formed and published by SMM according to this methodology, which can be used by both parties of the transaction as a reference for settlement of low-carbon aluminium spot trades. This price reflects the indicative range of the benchmark price for spot transactions (pick-up by customers at warehouses) that are most likely to be traded for low-carbon aluminium within the technical indicators defined by SMM when the SMM low-carbon aluminium benchmark price is released on each complete working day. This price is a price benchmark, and low-carbon aluminium of different technical indicators or other technical indicators can be priced using as this price as a benchmark plus premiums or discounts. The price is mainly based on the spot transaction price of low-carbon aluminium in Chinese market on the current day.

The significance of publishing SMM low carbon aluminium benchmark price:

- To establish China's low-carbon aluminium benchmark price information database;

- To comprehensively and systematically monitor and reflect China's low-carbon aluminium price trends and market conditions;

- Beneficial for government management departments to monitor and manage the low-carbon aluminium market; and an important reference for formulating relevant industry policies;

- To improve the presence and voice of China's low-carbon aluminium spot prices;

- To provide a decision-making basis for low-carbon aluminium spot production enterprises, trading enterprises, downstream users and other enterprises;

- To provide price information for spot low-carbon aluminium import and export enterprises;

- To provide reference for future low-carbon aluminium futures transactions;

- To further enhance SMM' leading position in domestic aluminium industry in terms of prices and information.

2.2 Introduction to SMM prices method

The SMM low-carbon aluminium prices consists of three parts, the spot benchmark prices of aluminium, the weighted carbon emission difference between low-carbon aluminium enterprises and domestic aluminium enterprises, and the carbon prices.

For spot aluminium prices, SMM will obtain the spot prices of aluminium from qualified contributors (that is, collecting raw data that meets the SMM standard) as the basis of evaluating SMM low carbon aluminium benchmark prices. The information collected from contributors include the quotes from buyers and sellers that do not reached a deal, the real transaction prices of spots, or other valid price suggestions. Each transaction that can be included as a valid price contribution shall engage no less than 50 mt of goods. The data collection and evaluation (calculation) of the benchmark prices of SMM low-carbon aluminium, as well as the daily management are all in charge by the SMM aluminium business group (with three members including one price manager).

For the carbon emission difference, since low-carbon aluminium involves the carbon emission difference factor with aluminium enterprises, SMM will introduce the existing weighted carbon emission value of domestic aluminium enterprises to calculate the difference between the low-carbon aluminium and the domestic carbon emission. SMM updates the difference between the low-carbon aluminium and the domestic weighted average every quarter. With the change of the energy structure of aluminium enterprises, the quarterly carbon difference will change as well.

For carbon prices, SMM introduces the CEA closing prices of the national carbon market published by the Shanghai Environment and Energy Exchange.

(CEA: Carbon Emissions Allowance, as is specified in the "Measures for the Administration of Carbon Emissions Trading (Trial)" (Ministry Order No. 19), "Carbon Emissions Trading Management Rules (Trial)" (Announcement No. 21 of 2021), the products of National Carbon Emissions Trading Market are carbon emission allowances, and the Ministry of Ecology and Environment may add other trading products in a timely manner in accordance with relevant national regulations. The carbon emission allowance transaction is priced by "per mt of carbon dioxide equivalent". The minimum change in purchases and sales volume is measured as 1 mt of carbon dioxide equivalent, and the minimum change in the declared price is 0.01 yuan.)

2.3. Sources of raw data

SMM will select representative market participants from the industry chain as targeted price contributors for SMM low carbon aluminium benchmark prices (i.e. data providers including manufacturers, traders and downstream participants). SMM will take all reasonable measures to determine and verify the authenticity and reliability of each price contributor. SMM's procedures are designed to minimise the risk of using any abnormal price data and to boycott any manipulation of price indices.

SMM policy includes but is not limited to the following steps:

SMM will collect relevant documents (such as business licenses, etc.) of each contributor and verify the authenticity of the documents to ensure that each contributor is a participant in the transaction, purchase, sale or production of the industry chain of low-carbon aluminium products.

SMM will ensure that each employee who is designated as the contact of the contributor has the right to directly access the relevant data in the company, and has the necessary authority and capability to submit the data to the price analyst of SMM in a timely manner. SMM will validate the reputation of each contributor by communicating with other reputable market participants.

SMM selects the price contributors according to the above criteria, and forms a relatively stable list of contributors. SMM will sign an agreement in writing or non-writing with each contributor to ensure that the price data is accurate and provided in a timely manner. At the same time, SMM will protect the corporate secrets of the contributors. SMM arranges a full-time price analyst to collect the information, and communicates regarding the market situation related to price information. SMM will continuously evaluate each contributor according to the above criteria, and adjust the list of contributors based on the evaluation results. For contributors whose evaluation results do not meet the above standards, SMM will notify them to rectify within a time limit and exclude them from the list for the time being. If the contributor refuses to rectify or does not meet the standard after rectification within 30 days after the rectification notice is issued, SMM will terminate its qualification as a contributor.

According to the agreement, SMM price analysts will collect relevant data and information on the benchmark prices of low-carbon aluminium from the quoting enterprises through telephone, QQ, WeChat, fax, email, etc regularly (every working day in principle, at least 2 times a week for conversion margins). The price data offered last time will not be used as the basis for the intraday price assessment, and the incomplete data that does not contain the required minimum details will not be adopted even they were offered before the deadline). The price data information may include the specific intraday transaction price or the conversion margin based on the low-carbon aluminium price, the most expected price to be traded, or the most expected conversion margin based on the low-carbon aluminium price, quotations, counter-offer, etc. Records of all instant messaging, e-mail communications and any face-to-face communications will be archived; details of telephone communications will be summarised and collected into a database. This price information is a typical and reproducible transaction that occurs between participants in non-affiliated markets (completely independent financially and legally).

SMM analysts must comply with business ethics when reporting to their supervisors any forced or threatened communication from market participants, or any kind of induced quotation that attempts to influence the evaluation. The price data information provided by the enterprises to SMM should include at least the following content, and SMM price analysts should encourage the enterprises to submit as much relevant details as possible:

2.4 Formation of SMM low-carbon aluminium benchmark price

Due to the complex technical parameters of low-carbon aluminium, SMM low-carbon aluminium benchmark price only refer to the specification and technical parameter range defined by SMM itself. The low-carbon aluminium specifications and technical parameter ranges specified by SMM are detailed in 2.5 below.

Low-carbon aluminium price formula

SMM low-carbon aluminium price = SMM intraday spot aluminium price in Foshan + (quarterly weighted carbon emission value of aluminium enterprises across the country - quarterly weighted carbon emission value of aluminium enterprises in Yunnan) * closing price of the national carbon emission allowance (CEA) on the previous trading day

2.5 Low-carbon aluminium specifications and technical parameter ranges specified by SMM

The benchmark price is the spot price of aluminium ingots in Foshan, and the announcement agency is SMM.

A00 aluminium ingots meet the requirements of “Aluminium Ingots for Remelting” GB/T 1196-2017 for the "Al99.70" grade.

Carbon emission difference refer to the difference between the weighted carbon emission value of the four major aluminium enterprises in Yunnan and the weighted carbon emission value across the country in the carbon emission model updated by SMM quarterly

Carbon price refer to the closing price of CEA in the national carbon market on the previous trading day, as announced by the Shanghai Environment and Energy Exchange.

Main companies offering quotations: Yunnan aluminium , Yunnan Shenhuo Aluminium, Yunnan Hongtai, Yunnan Qiya aluminium, etc. The current low-carbon aluminium specifications includes the products from Yunnan Hydropower and other aluminium enterprises. In addition, the newly shortlisted low-carbon aluminium enterprises need to obtain the CQC (China Quality Certification Center Carbon Footprint) certification with a carbon dioxide emission value lower than 4 mt, or meet the SMM standard that the non-cradle-to-gate carbon dioxide emission is less than 2.5 mt.

Reference transaction volume: SMM defines a typical transaction volume that can reflect market circulation as 50-2000 mt per transaction

Method of delivery: The goods shall be delivered on the day and picked up by the buyer; the cargoes shall be transported by truck

Payment method: Bank cash transfer, arriving to the account on the day

Delivery location: Self-pickup from the social warehouse (or self-pickup from the manufacturers’ factory with freight)

Pricing unit: yuan/mt

Presentation: By range, including 13% value-added tax

Publication time is 10:15-10:20 a.m. on each working day (China’s legal holidays and weekends excluded)

2.6 Methodology changes

All markets are changing, and it is the responsibility of SMM to ensure that the methodology for market reports changes with the market. Therefore, SMM regularly conducts internal reviews of methodological adequacy based on industry feedback. For all potential modifications that are substantial but not urgent, SMM will follow a formal external consultation process. Major changes will be announced with a notice period of at least 28 days, and industry players are invited to comment, unless special circumstances, especially force majeure (natural disasters, wars, exchange bankruptcy, etc.), result in a shorter notice period. SMM promises to carefully review all comments on proposed methodological changes, but in some cases, methodological changes may be made against the wishes of some market participants. In addition, SMM has a formal methodology consultation process. SMM has committed to hold a formal consultation on the low-carbon aluminium report at least once a year. The date of last consultation and the deadline by which SMM commits to holding the next consultation is at the top of the methodology document. See details in SMM Methodological Review and Change Policy.