China’s Aluminum Industry Faces Dilemma

China’s aluminum industry started since 1954.In 1983, the state government established the strategic guideline of “giving priority to developing aluminum” in the nonferrous metal sector, ever since then, aluminum industry walked into a brand-new development stage. In 1992, the national aluminum output for the first time topped the mark of 1 million tonnes.Subsequently, in a matter of 10 years, the output quickly grew from 1.09 million tonnes to 4.33 million tonnes in 2001, ranking top in the world, and maintained the fast growth momentum.

Since then, the “combined serial policies” of macro control and regulation implemented by the state government never stopped. As early as in 2007, the National Development and Reform Commission promulgated “ Aluminum Industry Entry Conditions” in order to restrict production capacity, which raised the access threshold of the aluminum industry; on April 20, 2011, 9 ministries and commissions jointly printed and distributed “Urgent notice on Curbing Capacity Surplus and Repeated Construction of Aluminum Industry to Guide Healthy Development of the Industry”, during this period, we still could often hear the news of regional governments cancelling preferential policies for aluminum enterprises.

Looking back, though it is understandable that around 2007, stimulated by rapid growth of national economy and high level of return on investment, China’s aluminum industry expanded quickly during this period, yet now it is absolutely incomprehensible to find investment heat wave picking up speed against the general economic trend, and the aluminum industry is still in full swing, Despite the newly added 3.40 million tonnes of capacity in China’s aluminum industry in 2011, in 2012 the ongoing and newly built project capacity is tremendous. According to the estimate made by one industry insider, in 2012 China’s aluminum will add new capacity of up to 2.70 million tonnes, in 2012 China’s aluminum output will reach 21.95 million tonnes.

A group of large enterprises are launching aluminum projects in West China. By the end of 2011, in Xinjiang alone the proposed or ongoing production capacity is as high as 13.05 million tonnes, whereas currently the national total production capacity is about 26 million tonnes.

China’s aluminum production capacity has ranked at world top position for 11 consecutive years. In 2011, China’s output of aluminum grew by 11.53% over that in the previous year,accounting for about 40% of global total. Such is the output, what about the consumption?Under the situation of domestic credit squeeze,there is no bright spot in real estate and automobile consumption, in particular the regulation and control of the real estate industry severely depressed the demand for aluminum industrial profiles, which further highlighted the sluggish situation in domestic aluminum product consumption. Industry insiders pointed out that, in fact the aluminum demand peak season in this spring never kicked off, aluminum market stayed in tepid condition,due to the sluggish growth of domestic real estate, high-speed railway, and automobile industries and the weak export situation,downstream aluminum processing enterprises are experiencing shrinking orders and dropping rate of operation. According to reports, the overall number of orders among aluminum processing enterprises declined by around 20%～30% than the same period in the previous year, some enterprises’ order volume even dropped by around 50% than the same period last year, the overall rate of operation of aluminum product processing enterprises is only about 80%. After June and July,aluminum consumption will gradually enter slack season, short-term prospect is still gloomy. Therefore, judging from the perspective of total supply and total demand,“surplus production capacity” has not been placed under total control.

The resource guarantee problem triggered by overly fast growth of aluminum capacity will also become prominent. The “scar” of aluminum oxide, the key raw material of aluminum production in China, might crack again. According to data from China Nonferrous Metals Industry Association, in 2011 the foreign dependence of China’s aluminum resource reached 47%. Based on actual output of China’s aluminum oxide in 2011 at 34.08 million tonnes, assume they are all manufactured with domestic bauxite as raw material, then the static guarantee period of existing verified bauxite reserve available for economic use can only last 9 years, on the other hand, the majority of bauxite resources controlled by Chinese enterprises in overseas countries are at the stage of geological prospecting, and are yet unable to meet the needs of guaranteeing resource security. In the recent two years, China’s import bauxite rose significantly; in 2011, China’s import reached 44.85 million tonnes, up by over 50%. China imports bauxite chiefly from Indonesia,Australia and India, in which Indonesia’s percentage reached 80%. Indonesian government recently has signed supervision decree to ban aluminum ore export since 2014.This will undoubtedly create significant impact on China’s aluminum oxide manufacturers, so as to affect the security of the entire aluminum industrial chain.

Beginning from December 1, 2011, the national average power price will be increased by 0.03 yuan per kWh, this is undoubtedly a piece of bad news for the aluminum industry in which half of the enterprises are losing money.According to estimates made by industry insiders, to produce one tonne of aluminum, it needs an average power consumption of 15,000 kWh, the added 0.03 yuan will need around 450 yuan increase in the cost of aluminum per tonne, plus consumption in auxiliary production posts, in other words it needs an upward adjustment of 500 yuan per tonne for finished aluminum ingot, in order to make up for the shortfall.

According to statistics of China Nonferrous Metals Industry Association, at present excluding Qinghai and Xinjiang, the actual power prices per kWh of aluminum manufacturers in the remaining regions all exceeded 0.45 yuan, the cost of aluminum per tonne reaches 16,400 yuan, which is higher than product sales price. The power price of aluminum enterprises in some parts of Northwest China is 0.45 yuan per kWh,enterprises have some marginal profit or thin profit, power prices in Henan, Sichuan,Yunnan, Guizhou, and Guangxi approach or exceed 0.6 yuan per kWh, the tax-included cost of aluminum per tonne can reach 18,400 yuan.In Henan, a major aluminum production area in China, in 2011 its production capacity reached 4.59 million tonnes, the actual production output was 3.92 million tonnes, its power price is 0.64 yuan per kWh, the aluminum per tonne cost has reached 19,000 yuan, making it a typical case of loss-making operation.

In the face of difficult times, the aluminum industry is also changing. The first way is to walk a path of “Westward Relocation”.Owing to the cancelation of preferential power price and the frequent upward adjustment of power price in recent years, aluminum enterprises began to shift to regions with energy advantage in order to seek development space. Today, energy is accounting for over 47% in the cost of aluminum. As a high energy consumption industry, at the current stage the key to earn profit for aluminum industry lies in the price of power. From this it is easy to understand that aluminum in fact earns it profit from power price. This feature of aluminum industry also determines who owns power advantage will possess competitiveness.

Provinces like Inner Mongolia, Ningxia,Shaanxi, Gansu, Qinghai, and Xinjiang in the western part of China contain rich energy and power resources, Sichuan, Chongqing,Guizhou, and Yunnan provinces have abundant hydropower resources, which endows them with the advantage to develop aluminum on a moderate scale. According to industry insiders,most enterprises investing in aluminum in the West can obtain relatively reliable coal resources, and are equipped with self-owned power plant. According to calculation, the power generation cost per kWh of self-owned power plant is under 0.2 yuan, compared with the price of over 0.5 yuan per kWh in inland provinces, there is relatively large profitearning space in terms of aluminum per tonne.Despite the excessively high transport cost,when everything is taken into account, the return on investment is quite considerable.Therefore, western provinces have become the region with the fastest growth in aluminum capacity since the outbreak of sub-prime mortgage crisis. In 2011, the output from the western region has reached 55% of total output.Among top 10 aluminum output regions, six come from the West.

According to statistics of China Nonferrous Metals Industry Association, since 2009, 90%of the newly added aluminum capacity comes from northwestern region. In 2011, newly added aluminum capacity was 3.40 million tonnes, which is mainly concentrated in Xinjiang and Qinghai, in the western region,the previously rarely mentioned Xinjiang is now becoming a highlight of aluminum development. In 2011, the investment amount of new projects in Xinjiang reached 85.4 billion yuan, which is mainly focused on aluminum smelting projects. At present, the completed,ongoing or proposed capacity in Xinjiang has topped 13 million tonnes. In the face of pressure in aluminum capacity from the West,central and eastern regions, especially those aluminum enterprises lacking support in raw material and energy support, has only one way to seek transformation, and exit the market as soon as possible. The days left for aluminum enterprises in the central and eastern regions are numbered, it is now essential to prevent the recurrence of industry “moved but not relocated” tragedy, and this requires the state government and industry supervising departments to strictly follow the guideline of overall control: While ensuring “Westward Relocation”, the step cannot be to fast, too massive, and too violent. While implementing“Westward Relocation”, some outdated capacity in the central region must be phased out, although it will endanger local government’s GDP and investment promotion,and bring harm to the interests of surrounding downstream deep processing enterprises, from the perspective of overall situation and long term planning, it is necessary to “make a prompt decision at the right moment”,otherwise, it will only aggravate the surplus of capacity in the industry.

The second way is to seek policy support.Aluminum is a high energy consumption industry, on the other hand, it is also called“high energy consuming industry”, overseas countries have relatively preferential policies to aluminum industry, the reason is that aluminum industry plays a key role in balancing the peak and off-peak periods of the entire power grid, it can be argued that aluminum industry plays the regulating role like a “reservoir”. Some provinces and cities in China once have implemented such practice, but are forced to cancel it because it conflicts with China’s reality of restricting high power consumption.In the light of current situation, the state government and local governments need to give some necessary preferential policies to aluminum enterprises, which needs further negotiation and coordination.

The third way is to walk the path of coalpower-aluminum integration. Because of aluminum’s reliance on energy, power cost accounts for over 40% in the production cost of aluminum, so enterprises with self-owned power plant have great advantage in cost. With a power plant, there must also be coal mine or other energy sources as support of the power plant. Excluding coal-power-aluminum integration, there are also other paths such as aluminum-electricity joint operation and direct power purchase. However, regardless of coalpower-aluminum integration or direct power purchase, they will all involve balance of interest between different industries and different supervising departments, the way ahead is particularly difficult, but there is no lack of previous examples.

The fourth way is to walk the path of high added value products. Although cost hike is inevitable, an industrial chain of high technology and high added value will give new profit-earning space to the aluminum industry,which can make up for the loss brought by cost increase, and enhance enterprise’s core competitiveness, therefore, products with deep processing and high added value, cutting edge technologies, and state-of-the-art products will become inevitable choice for the industry to acquire further growth.