(The opinions expressed here are those of the author, a
columnist for Reuters)
By Andy Home
LONDON, March 3 China's "Air Pollution Control"
regulation was formally approved on Feb. 20 and published on
Feb. 28. It came into effect on Wednesday.
It may sound pretty innocuous but, make no mistake, it
represents a potential redefinition of the global aluminium
The world's largest producer of the metal will force
aluminium smelters in four provinces surrounding Beijing to cut
output by 30 percent over the winter heating season, which runs
from the middle of November through the middle of March.
The news has lit a fire under the aluminium price. On the
London Metal Exchange (LME) benchmark three-month metal
has this week hit a near two-year high of $1,957 per tonne.
Some 40 percent of China's production capacity is
potentially affected with analysts calculating a 1.3 million
tonne hit on output.
That may yet prove a conservative estimate, though. The new
directive will also impact raw material suppliers such as
alumina refineries and carbon anode plants, sending shock waves
down the length of the global aluminium supply chain.
FACTBOX on China's new pollution-cutting measures:
NO PRISONERS IN WAR ON POLLUTION
It might seem strange that Beijing's war on pollution is
going to hit so hard aluminium, a metal that has been at the
forefront of the "green" materials revolution.
But much of the affected capacity in the provinces of Hebei,
Henan, Shandong and Shanxi sources its power from coal, which is
the primary target of the new regulations.
There was understandable scepticism when the government
first proposed the idea in January.
Everyone knows that you can't just turn an aluminium smelter
on and off with the flick of a switch. It takes time to ramp
down and ramp back up production and the financial costs on
producers will be heavy.
The assumption was that powerful, politically connected
companies such as Chalco would lobby aggressively against the
forced curtailments or, as has so often been the case in the
past, just ignore Beijing's orders with the connivance of local
But this time Beijing really means business.
The statement announcing the new law was jointly issued by
some of China's most powerful bodies: the Ministry of
Environmental Protection (MEP), the Finance Ministry, the
National Development and Reform Commission (NDRC) and the
National Energy Bureau.
It comes against a background of increasingly draconian
inspections of industrial plants of all shapes and sizes led by
the head of the MEP. Local environmental audit teams have been
The message, according to Paul Adkins of AZ China, a
consultancy specialising in China's aluminium sector, is "no
more protecting local companies".
"If the local government guy fails to act to the standards
set by the MEP, he goes to prison," Adkins told Reuters' Base
Metals Forum on Thursday. It's "a sure way to gain compliance."
ALUMINA AND CARBON
It's not just aluminium smelters that will be affected.
Producers of alumina, an intermediate product sitting
between bauxite and metal in the production process, will also
have to cut capacity by 30 percent.
The four provinces account for almost 70 percent of China's
alumina production and Adkins estimates that the winter cuts
will mean the loss of 2.71 million tonnes.
This in a market that was already expected to be in marginal
global supply deficit this year.
Moreover, refineries in Shandong rely heavily on imported
bauxite, potentially transmitting the impact of Beijing's war on
smog all the way up the supply chain to major bauxite suppliers
such as Australia, India and Guinea.
The real sting in this anti-pollution tale, however, may be
the hit on producers of the carbon anode that also goes into the
As Adkins explained, carbon plants that fail to make the
environmental grade will be closed over the four-month period
but even those that do make the grade will have to curtail
"There's a large number of (anode) plants in the target area
and we estimate the direct impact will be a loss of three
million tonnes of aluminium capacity due simply to smelters'
inability to source anodes for the production process."
The carbon shutdowns, in other words, could have a bigger
impact on national aluminium production than the headline
Such a potential supply shock is unprecedented in the
This market's problem for many, many years has been
over-supply, first and foremost in China itself.
Producers everywhere else have been forced to close smelters
and curtail capacity in response to the country's
ever-increasing production rate. China's share of global output
has risen from 30 percent to 55 percent over the last decade.
The country has exported over four million tonnes of
aluminium in the form of semi-manufactured products in both 2015
Only last week Russia's Russian Industry and Trade Minister
Denis Manturov was mooting the idea of an OPEC-style
organisation to regulate supply.
Years of excess should in theory provide a cushion against
the sort of disruption planned by Beijing.
China itself was expected to generate a surplus in the order
of 2.1-2.3 million tonnes this year, according to a Feb. 27
presentation by Roy Harvey, chief executive of U.S. producer
Alcoa, at the BMO Capital Markets Global Metals and Mining
But with the rest of the world forecast to be in supply
deficit of 1.5-1.7 million tonnes, the expected global balance
is a much smaller 0.4-0.8 million surplus.
All such calculations have just been upended.
And although there is much speculative heat in the aluminium
price right now, China's supply shock could translate into a
fundamental reassessment of the light metal's pricing.
Of course, Chinese aluminium producers are going to pull
every political lever at their disposal to try to escape
Beijing's anti-pollution dragnet.
Particularly those with newer, cleaner plants, who will
argue that they are being unfairly targeted at the expense of
those using older, dirtier technology.
But as Adkins points out, as smog moves to the top of
Beijing's policy agenda, simply ignoring its wishes is no longer
(Editing by David Evans)