China Power Price Cut May Mean More Pain for Aluminum Market

  • China may reduce power tariff from November to benefit users
  • Tariff cut may drag aluminum to $1,400 a ton, Argonaut says

A helping hand for China’s economy may end up hurting aluminum prices, worsening a glut that’s threatening producers worldwide.

On-grid power tariffs in China may be reduced as soon as next month to benefit industrial users and bolster growth, according to three people familiar with the matter. The cut to the price the state grid pays to power generators for electricity would likely be passed on to consumers, according to analysts at Argonaut Securities Asia Ltd. and Shanghai Cifco Futures Co. For smelters hooked up to state supplies, which account for a quarter of capacity, that could cut costs by 375 yuan ($59) a metric ton, according to Essence Securities Co.

Aluminum is the second-worst base-metal performer over the past year as supplies top demand and investors desert commodities, with benchmark prices in London sinking to a six-year low this week. If prices remain at current levels , the entire U.S. smelting system is at risk, Austin, Texas-based Harbor Intelligence warned Monday. Hedge fund manager Dwight Anderson has dubbed aluminum as “miserable” amid the surplus.

In China, “some smelters could stay alive longer with the subsidy,” according to Essence analysts including Qi Ding, who estimate that 66 percent of producers are losing money. The reduction in costs from an electricity-tariff cut will weigh on prices because of the supply glut, they said.

Rising Output

On-grid power prices may be shaved by 0.03 yuan per kilowatt hour, according to the three people, who said the reduction may take effect in some regions from as early as Nov. 1. While that may seem a modest sum, electricity typically accounts for more than 40 percent of the cost of producing aluminum in China, where output is still rising even as growth slows.

Three-month aluminum dropped to $1,460 a ton on the London Metal Exchange on Wednesday, the lowest price since June 2009. It traded at $1,470.50 on Friday, 27 percent lower over 12 months.

If the China smelters’ cost reduction from the electricity tariff cut is passed on, aluminum will fall to $1,400 a ton, Helen Lau, an analyst at Argonaut Securities Asia, forecast in a report on Thursday.

— With assistance by Alfred Cang

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