by winston » Tue Aug 19, 2008 8:13 pm
China smelters brace for next power price move
By Polly Yam
HONG KONG, Aug 19 (Reuters) - Power-hungry Chinese aluminium smelters are bracing themselves for higher electricity prices next month after Beijing's second on-grid rate rise in two months, a move that will may force older smelters to cut output or sell out.
China, the world's second-largest electricity producer and consumer and top aluminium producer and consumer, said on Tuesday it will hike on-grid power tariff paid to thermal generators by 0.02 yuan per kilowatt-hour, a rise of about 5 percent, effective from Aug. 20. [ID:nPEK222278] [ID:nSP210262]
Although this will not affect electricity consumers directly since the state-owned grids will absorb the higher cost, smelters say they reckon a subsequent rise will hit them as Beijing battles its worst power deficit in four years, which has already forced some smelters to cut production.
"Smelters are talking about another power fee hike. We are quite certain the fees would be higher in September," an official for a listed aluminium smelter said, adding that the smelter had not received a notice.
Smelters that did not own power plants and which imported alumina would face problems, likely cutting output or selling assets, said Lan Ke, Beijing-based analyst at Southwest Securities.
The smelters could cut output or sell assets.
Beijing raised average electricity tariffs by about 4.7 percent from July 1, the first rise in two years, but pressure for another hike had mounted since then.
Though the authorities did not say if or when they would allow the state-operated grid to pass on the higher rates, analysts expected a subsequent rise in retail prices to follow.
Aluminium smelters' production costs would rise 145 yuan ($21.12) per tonne for each 0.01 yuan rise in power fees, Zhu said.
A hike of 5 percent may raise smelters' production costs by more than 300 yuan per tonne to about 17,800-18,300 yuan per tonne, smelter officials estimated.
At the same time, domestic aluminium prices have fallen nearly 5 percent this month, to 17,930 yuan per tonne on Tuesday, on increased supply after China said it will impose a 15 percent tax on exports of aluminium alloy from Aug. 20, amid soft demand.
But improved power supplies could give some smelters the confidence needed to launch tens of thousands of tonnes of new capacity, a trade manager at a large smelter in Henan province said.
Alumina, the main material for aluminium production, and electricity normally make up about 70 percent of production costs for smelters in China.
Expanding losses may boost acquisitions by large smelters, such as Aluminum Corp of China Ltd (Chalco) (2600.HK: Quote, Profile, Research, Stock Buzz) (601600.SS: Quote, Profile, Research, Stock Buzz), the country's biggest, similar to its 2005-2006 spree when it bought millions of tonnes of capacity.
"Chalco will continue to buy regardless of low profit margins on the international standard. A consolidation in China's aluminium industry is unavoidable," Geoffrey Cheng, an analyst at Daiwa Securities, said.
If China maintained a long-term plan to let the market determine coal and power prices, power fees would continue to rise, possibly making aluminium a low-margin business, he said.
"The question is: Is China's aluminium industry competitive?"
It's all about "how much you made when you were right" & "how little you lost when you were wrong"