Aluminum Smelters in China May Face Winter Power Shortage, Macquarie Says

Aluminum smelters in China may face a “critical shortage” of power that prevents them from ramping up output in the first quarter of 2011, helping to buoy prices as stockpiles decline further, according to Macquarie Group Ltd.

“Our recent visit to Shanxi and Henan provinces suggested the power supply would still be in critical shortage over the winter due to tight supply of coal,” analysts including Bonnie Liu wrote in a report today. Aluminum prices may gain over the next three or four months, they wrote, without giving a forecast.

China curbed power to energy-intensive industries in the final quarter in a bid to meet a yearend carbon-emission target, hurting output of some metals including aluminum. More than 2 million metric tons of aluminum capacity was halted in Guangxi, Guizhou, Henan and Hunan in the drive, according to the report.

“Although power restriction should ease significantly from early 2011, we believe it will be difficult to be able to fully restore power to all aluminum smelters,” said the analysts based in Shanghai.

Three-month aluminum on the London Metal Exchange has gained 4 percent since the start of the fourth quarter, trading at $2,453 a ton today. Aluminum for March on the Shanghai Futures Exchange traded today at 16,700 yuan ($2,517) a ton.

The power curbs led to a drawdown in aluminum inventories at so-called reported warehouses in China from 1.3 million tons in May to less than 600,000 tons, about two weeks of demand, the report said. The coal shortage may now help to reduce them further to “very low levels” in the second quarter,” it said.

‘Very Severe’

“Coal shortages have become very severe in the central part of the nation as Shaanxi, Hubei, and Henan provinces have recently experienced severe snow storms,” Jeffrey Landsberg, president of New York City-based Commodore Research & Consultancy, wrote in a Dec. 20 note.

State Grid Corp. of China, the larger of the nation’s two power distributors, said on Dec. 17 that a combined generation capacity of 5.23 million kilowatts has been shut because of a shortage of coal.

A total of 1.5 million tons of new aluminum capacity in Inner Mongolia, Guangxi, Gansu and Ningxia provinces is ready to be used from the start of 2011, the Macquarie report said. “It could take as much as three months to reach full capacity, leading to the market still remaining tight before the start of the second quarter,” it said.

--Helen Sun. Editors: Jake Lloyd-Smith, Richard Dobson

To contact the Bloomberg News staff on this story: Helen Sun in Shanghai at hsun30@bloomberg.net

To contact the editor responsible for this story: Richard Dobson at Rdobson4@bloomberg.net

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