China's Grid Still Stretched

China's overstretched power sector will get only faint relief from voluntary production cuts by the country's biggest aluminium smelters, and power problems may continue to limit output.

China's top 20 aluminium smelters recently said they had agreed to pare production of refined metal by 5–10%, a move that analysts estimate could reduce China's nationwide power consumption by less than 1%.

That followed news earlier in July that some smelters in Shanxi had already been forced to curb operations due to electricity rationing as China heads toward its worst power crisis since 2004, when widespread shortages and blackouts cut deep into industrial operations and caused oil demand to surge.

Between June and September of 2004, Chinese aluminium output growth shrank to an average 13.8% year-on-year versus average growth of 22.2% from February to May.

If implemented in full, the power cuts would save about 1,370GWh a month of power, cutting China's electricity consumption by less than 1%, analysts say.

"To put it in context, we lost slightly more than that in the earthquake in Sichuan, and the lights didn't go out in Beijing," says Simon Powell, head of regional research for power, gas and utilities at CLSA in Hong Kong.

An analyst at a Sydney brokerage estimated that the cuts would ease the capacity strain by around 2.4GW, about one tenth of the summer peak-rate power capacity shortfall forecast around China in regions that have already begun to ration supplies.

China's ferrous and non-ferrous metals industries account for around 20% of the country's entire energy consumption, while residential use is around 13%, according to CLSA.

GRID STRAIN

High coal prices, shortages and transportation problems, ice storms and the Sichuan earthquake have played havoc with China's energy supply infrastructure which is racing to keep up with annual gains of 10% or more in economic activity.

Unlike a shortage in 2004 caused by insufficient generating capacity, this time the squeeze is a result of power plants scaling back generation due to high costs or low supply.

Falling hydropower reservoirs and hot weather are exacerbating a problem that could come to a head during the summer Olympics in August, the hottest month of the year and a time when Beijing will be most intent on keeping the lights on. As result Beijing has taken a dim view of energy-gobbling industries, including aluminium, by discouraging exports and closing old, inefficient operations.

A typical aluminium smelter consumes 16.5MWh of electricity to produce one tonne of refined metal. Very modern plants can consume as little as 13MWh, while older capacity can use 40MWh to produce one tonne of metal.

"The energy situation is so tight that the government has had to act to ensure supplies to what it sees as the most important sectors of the economy," says Barclays Capital analyst Yingxi Yu.

"The bottom line is there will be less power for aluminium smelters and other energy-intensive industrial users and more for residential and farming sectors. We don't believe this will be the end of aluminium production losses related to power this year."