Production

Column: The pendulum of world aluminum production returns to China: Andy Home

LONDON, June 21 (Reuters) – China produced a record 3.42 million tonnes of primary aluminum in May as the country’s smelters continue to ramp up production.

The country’s annualized production jumped 3.66 million tonnes in the first five months of the year, culminating in the highest exploitation rate last month of 40.27 million tonnes, according to the Institute. International Aluminum Association (IAI).

Chinese smelters are resurfacing thanks to an easing power shortage that limited production for much of last year.

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This year it is European smelters that face an energy crisis as electricity prices soar following the Russian invasion of Ukraine.

Europe’s energy problems have caused annualized production outside China to fall by 460,000 tonnes so far this year.

China’s share of global production was 58.91% in May, a ratio that has only been surpassed once before in June 2017, a historical marker that may not be reliable given the lack of consistent data five years ago.

Annualized International Aluminum Institute Production Change

CHINESE RAMP-UP

This time last year, it was Chinese operators who were struggling to supply energy to their energy-intensive smelters.

Drought in hydropower-rich Yunnan province, combined with an overzealous enforcement of energy efficiency targets, has seen national aluminum production plummet by more than two million annualized tons in 2021.

Those targets have been relaxed and China has increased its coal production to ease last year’s lingering energy crisis.

Improving electricity prices and strong aluminum prices have generated a predictable rebound in Chinese tariffs, which after last year’s pause are once again approaching Beijing’s capacity cap of 45 million tons per year.

The reversal of fortune for Chinese foundries is evident in the country’s raw metal trade. Imports surged in 2021 as domestic production failed to meet first-use demand from product manufacturers. Inbound shipments of primary metals totaled a record 1.58 million tonnes.

This year, however, China exported raw metal despite a high 15% tariff on aluminum exports in this form. Read more

Much of what leaves China goes to Europe, which is currently experiencing its own aluminum smelting due to energy.

Annual change in aluminum production in Western Europe annualized

EUROPEAN COLLAPSE

Electricity prices in Europe were already heading north before Russia launched its “special military operation” in Ukraine.

The resulting tight gas supply to Europe has driven electricity prices up 400% over the past year, which is a big problem for aluminum producers, being given that electricity accounts for about 40% of their smelting costs.

The European aluminum association says around 900,000 tonnes of annual capacity has been impacted in the form of reductions or fluctuating operating rates.

Annualized production in Western Europe has fallen by around 500,000 tonnes over the past year, according to the IAI. May’s production rate of 2.96 million tonnes was the lowest this century.

The energy crisis is mainly affecting foundries in Germany, France and the Netherlands, with those in Norway and Iceland being cushioned by access to hydroelectric and geothermal energy respectively. Capacity in both countries has increased over the past year or so, which likely masks the total loss of production elsewhere in the IAI’s Western European figures.

Eastern European aluminum production is also falling. Cumulative production was down 1.5% year-on-year in the first five months of the year, reflecting reductions in Romania, Montenegro and the Slovak Republic.

The IAI’s latest monthly update shows no evidence of a drop in production at Rusal in Russia (RUAL.MM) despite sanctions disrupting the flow of raw materials to the company’s Siberian smelters.

Indeed, it is possible that the ramp-up of the new plant in Taishet will offset the cuts in the rest of Eastern Europe. In the absence of recent detailed production figures from Rusal, it is difficult to know.

With the current electricity crisis with no end in sight, greater European generation could be at risk in the coming months.

UBS analysts estimate that an additional 800,000 tonnes of European smelter capacity is at risk unless electricity prices fall, which currently seems unlikely. (“Aluminium: European gas under the microscope again”, June 21, 2022).

SWINGS OF THE ELECTRIC PENDULUM

The changing fortunes of Chinese and European foundries boil down to the same critical reliance on power.

Aluminum is not made by throwing bauxite into a blast furnace. On the contrary, bauxite must be refined into alumina which is then transformed into metal by electrolysis.

Aluminum is in many ways electricity in solid form, which is why foundries are so sensitive to electricity pricing.

It’s a problem for aluminum production wherever smelters compete with other industries for energy, especially from renewable sources, as they try to produce an ever “greener” metal. .

The exponential increase in electricity prices in Europe after the Ukrainian invasion poses an existential threat to many operators in the region.

The need to import a metal which is a key catalyst for the decarbonisation of a country where coal is still the main source of energy for the production of aluminum is very problematic for the European Union.

Not just in terms of carbon footprint, but also in the context of the bloc’s commitment to what it calls “strategic autonomy” in its mineral supply chains.

There may be another big problem for the aluminum supply chain waiting in the wings.

Chinese smelters are currently enjoying positive margins thanks to a combination of higher metal prices and lower electricity costs resulting from the government backtracking on coal use targets.

But for how long ?

Despite the coal race, there are signs of stress building up in parts of China’s power system.

Electricity consumption rose in Chinese provinces north of the Yangtze River due to warmer-than-normal weather, with Henan setting a new peak demand load record over the weekend. Read more

The strain on the grid will only get worse as China tentatively emerges from its coronavirus lockdowns and begins to restart manufacturing activity again.

If the summer is to be long and hot in China, electricity will take priority to cool homes with large industrial users facing rationing.

The aluminum pendulum may have returned from the rest of the world to China, but there is no guarantee that it will stay there for long.

The opinions expressed here are those of the author, columnist for Reuters

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Editing by David Evans

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.