Peak aluminium looms for China as Xi pushes new green mission

[BEIJING] China's hawkish climate policy is poised to do what years of international pressure didn't: halt the growth of the world's biggest aluminium industry.

As policymakers in China puzzle over how to meet President Xi Jinping's goal for carbon neutrality by 2060, the industry that relies heavily on coal-fired power is in the government's crosshairs. A recent halt on new projects by one major aluminium production hub triggered talk of a wider blitz that could end a decades-long expansion to capture almost 60 per cent of global output.

Peak production will come sooner than the 2025 target anticipated by top smelters, according to five traders and analysts surveyed by Bloomberg. Goldman Sachs Group Inc. expects a global supply deficit from this year, stretching to at least 2023. That prospect helped push aluminium futures in Shanghai to a decade-high last week.

Aggressive Pursuit

Inner Mongolia, a northern province, will stop approving new aluminium projects after getting upbraided by Beijing for failing to control energy usage in 2019. The province is one of China's coal-rich areas where aluminium producers have sprung up to enjoy cheap but dirty coal-fired electricity.

"Energy consumption will be a red line that puts an explicit constraint on supplies of aluminium," Wang Rong, chief metals analyst with Guotai Junan Futures Co in Shanghai. "It's reasonable for the market to expect restrictions in Inner Mongolia to spread to other production areas, as China is aggressively pursuing carbon neutrality." This pivot could shake up prospects for aluminium, used in everything from cars to window-frames. Prices have been plagued over past decades by consistent supply gluts, partly due to aggressive expansions in China's cheap-energy regions. Aluminium could also offer a test for how one of the Communist Party's top priorities is enforced by local governments and companies.

Global Tensions

China has rejected claims that its rise to dominate the aluminium world contributed to the decline of western production hubs. Its output last year rose to a record 37 million tons, more than ten times the volumes in western Europe. China's exports expanded aggressively to hit a record in 2018, triggering tensions with overseas rivals and calls for China to rein in capacity.

Chinese producers have faced waves of trade measures from India to Brazil and Europe, and aluminium was an early target of Donald Trump's America-First agenda. His tariffs on aluminium and steel imports, launched on national security grounds in 2018, were "effective," President Joe Biden's commerce secretary said Thursday. That's despite mixed results and continued complaints from aluminium buyers.

'Not Congruent'

China's lawmakers opened the country's annual parliament Friday with some more green targets for 2025. Those included reducing carbon emissions per unit of economic growth by 18 per cent up to 2025, and getting 20 per cent of energy from non-fossil fuel sources by 2025.

Aluminium, accounting for about 3.6 per cent of the country's emissions, is a target along with other carbon-heavy sectors like steel and cement.

"China's decarbonisation policy targets are becoming an increasingly immovable block to any future expansion trends in China's smelting sector," Goldman analysts including Nicholas Snowdon said in a note. "The emerging risk is that provinces decide medium energy consumption targets are not congruent with the current size of the aluminium smelting sector." To be sure, there's few expectations of output shrinking any time soon. But with demand growing strongly, there's the prospect of deficits in China fuelling a global shortage. The global aluminium market faces a supply shortfall of 400,000 tons in 2021, before much bigger gaps in 2022 and 2023, Goldman said.

Any more restraints on China's aluminium industry could even open up more frequent opportunities for the rest of the world to sell to China. There were glimpses of that last year, when imports of unwrought aluminium shot up to their highest since 2009.

BLOOMBERG