BEIJING (Reuters) – Erratic rainfall in southwestern China is frustrating a multibillion-dollar effort to green an aluminum industry that accounts for almost 60% of global output and, by some estimates, emits more carbon dioxide than Australia.
Lured by official promises of cheap hydropower, the China Hongqiao Group and a handful of other coal-dependent smelters several years ago began moving 6.56 million tons of capacity — about 15% of China’s total — from the northern rust belt to the mountainous and ethnically diverse areas. Yunnan Province, known for tea, coffee and wild mushrooms.
The opportunity to lower electricity bills and help the world’s biggest polluter tackle global warming seemed like a safe bet. But as Yunnan’s rivers and reservoirs shrank due to poor rainfall, which some experts blame on climate change, electricity reliability also declined.
Reuters interviews with nearly two dozen industry figures and analysts, as well as company filings and official documents, show that insufficient hydropower has meant that only just over half of the planned shift in aluminum capacity has been achieved. Some smelters are delaying or scaling back their already postponed plans, while others are looking for alternative locations.
“The power outages of the past two years have made it clear that Yunnan cannot be maintained as a major manufacturing region,” said a Yunnan industry figure who, like others, spoke on condition of anonymity due to the sensitivity of the issue.
Despite growing demand for low-carbon products and strong industrial profits in recent years, eight workers at four smelters in Yunnan said they had to cut production by 10% to 40%.
Remove ads
.
Muyi Yang, an adjunct fellow at the University of Technology Sydney who researches energy policy, said any supply disruption would slow China’s broader energy transition because aluminum is used in many clean technologies.
In addition to hampering China’s climate goals, the hydro crisis has also caused volatility in global aluminum prices and jeopardized the potential for producers to capitalize on demand for ‘green’ metal, analysts and industry sources said.
Hongqiao’s plan to move nearly 4 million tons of production from Shandong province to Yunnan included building two factories near the border with Vietnam, in Wenshan and Honghe prefectures, each with a capacity of about 2 million tons.
The 17 billion yuan ($2.35 billion) Wenshan factory opened in 2020 and was targeted to reach full capacity in August 2022, the director of the industrial park where the factory is located told the state media. But unstable hydropower has prevented that, two industry figures say. said.
In Honghe, production would begin in March 2023, according to a December 2021 overview of projects published by the Yunnan Department of Industry and Information Technology. Still, the initial production capacity of only 500,000 tons will be ready by the middle of this year, according to a person familiar with the matter.
Chen Xinlin, a senior metals and mining consultant at Wood Mackenzie, said Honghe’s capacity may not be commissioned this year due to the “hydropower bottleneck”.
Hongqiao and its parent company, Shandong Weiqiao Pioneering Group, did not respond to Reuters questions about the matter, and the Yunnan government declined to comment.
Remove ads
.
China’s ministries of environment and industry, and its top planning agency, the National Development and Reform Commission (NDRC), did not respond to requests for comment.
GREEN DREAMS
According to the International Energy Agency, aluminum is responsible for about 3% of the world’s direct industrial carbon dioxide.
For China, this meant cleaning up the sector would be crucial to its targets, formalized in 2020, for the country’s carbon emissions to peak by the end of this decade and reach net zero by 2060.
Part of the appeal of aluminum made from hydropower or other clean energy is that producers can demand premiums if global manufacturers raise their carbon standards for materials, although currently only a small portion of green aluminum receives such a premium.
In addition to Hongqiao, producers including market leader Aluminum Corporation of China, known as Chinalco, were drawn to Yunnan by the provincial authorities’ offer of discounted greener power at 0.25 yuan per kilowatt hour (kWh), less than half of what they were paying Northern China paid. .
Chinalco announced in 2018 it would move 1.2 million tons to Yunnan, and suppliers including anode maker Sunstone Development followed suit. Neither responded to requests for comment.
The new smelters brought in workers from northern China, with factory canteens serving stewed noodles and shaobing, a flatbread filled with meat, to give workers a taste of home.
The factories produce silver-colored ingots that are cast from molten aluminum into square bundles. These are collected by trucks and delivered to factories for processing into goods such as car parts, window frames and beer cans.
Remove ads
.
A 2022 World Economic Forum report predicted that 2 to 3 million tons of primary aluminum production would move annually to southwestern China, mainly Yunnan, between 2020 and 2025, declining to 90,000 to 100,000 tons per year by 2060 .
The pace has been much slower.
Officials were aware that power was a potential limitation.
“Solving power supply problems is the first thing Wenshan should work on to develop a green aluminum industry,” He Chun, deputy bureau chief of the Wenshan Energy Bureau, told state media in 2021.
But the rain didn’t seem to cooperate. Yunnan’s Water Resources Department said in January that severe drought had persisted for a fifth year, leading to reduced hydropower production.
On April 16, Wenshan officials warned of extreme drought in Yanshan province, which is home to several aluminum factories, including a Hongqiao smelter. According to the Wenshan government, average rainfall has fallen by 37% so far this year.
To compound the smelters’ dilemma, the NDRC banned reduced energy rates for aluminum producers in 2021.
‘MAY THERE BE MORE RAIN’
In interviews with Reuters, 10 industry figures at smelters moving to Yunnan described higher-than-expected electricity rates and periodic orders from the energy supplier, China Southern Power Grid, to close at short notice.
Electricity rates had risen to 0.47 to 0.50 yuan per kWh, seven of these people said, still lower than what smelters in the north were paying.
China Southern did not respond to a faxed request for comment.
Producers including Chinalco-owned Yunnan Aluminum and Henan Shenhuo Coal & Power, neither of which responded to requests for comment, have cited Yunnan’s power problems in financial filings.
Remove ads
.
In its 2023 annual report, Shenhuo warned that further electricity tariff increases or supply disruptions would create uncertainty for its business.
Yunnan has tried to free up electricity by limiting transfers to other provinces. The provincial government has also said it will accelerate the construction of wind and solar power, as well as more hydropower plants, and strengthen thermal energy capacity, which comes mainly from coal.
But frustrated smelting industry figures say they will have to look elsewhere.
“No one dares to stick to their relocation plan” because of Yunnan’s power problems, said a manager at a Yunnan smelter.
Analysts expect more capacity to shift to northwest China, where there is greater access to energy, including coal, that can ensure a stable supply for smelters.
In May 2023, Weiqiao’s chairman Zhang Bo announced plans with the Shandong Chuangxin Group to build a green aluminum base in Inner Mongolia powered by wind and solar energy, according to a statement on the regional government’s website.
For now, the Yunnan smelter operators are looking to the sky.
“May there be more rain, that’s the best we can wish for,” said a smelter employee.
($1 = 7.2448 renminbi)
