BEIJING (Reuters) – Erratic rains in southwestern China are thwarting a multibillion-dollar effort to green an aluminum industry that accounts for nearly 60% of global output and, by some estimates, emits more carbon dioxide than Australia.
Lured by official promises of cheap hydropower, China Hongqiao Group and a handful of other coal-dependent smelters began several years ago to move 6.56 million metric tons of capacity – about 15% of China’s total – from the rust from the north to the mountainous and ethnically diverse regions. Yunnan province, known for tea, coffee and wild mushrooms.
The opportunity to reduce electricity bills and help the world’s biggest polluter combat global warming seemed like a safe bet. But as Yunnan’s rivers and reservoirs declined due to low rainfall, which some experts attribute to climate change, so did the reliability of electricity.
Reuters interviews with nearly two dozen industry figures and analysts, as well as company records and official documents, concluded that insufficient hydropower meant that only a little more than half of the planned change in aluminum capacity materialized. Some foundries are slowing down or scaling back long-delayed plans and others are looking for alternative locations.
“Power cuts over the past two years have made it clear that Yunnan cannot be sustained as a major producing 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 industry profits in recent years, eight employees at four Yunnan smelters said they had to reduce production by between 10% and 40%.
Muyi Yang, an adjunct researcher at the University of Technology Sydney who researches energy policy, said any supply disruption would delay China’s broader energy transition because aluminum is used in many clean technologies.
In addition to harming China’s climate goals, the water crisis has caused volatility in global aluminum prices and imperiled producers’ potential to profit from demand for the “green” metal, according to analysts and industry sources.
Hongqiao’s plan to shift nearly 4 million tons of production from Shandong province to Yunnan involved building two factories near the border with Vietnam in Wenshan and Honghe provinces, each with a capacity of about 2 million tons. .
The 17 billion yuan ($2.35 billion) Wenshan factory opened in 2020 and was expected to reach full capacity in August 2022, the director of the industrial park where it is located told state media in 2021. But the instability of hydropower prevented this, two industry figures said. he said.
At Honghe, production was expected to begin in March 2023, according to a December 2021 project overview published by the Yunnan Department of Industry and Information Technology. Even so, the initial production capacity of just 500,000 tons will be ready by the middle of this year, according to a person familiar with the matter.
Chen Xinlin, senior metals and mining consultant at Wood Mackenzie, said Honghe 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 on the matter, and the Yunnan government declined to comment.
China’s environment and industry ministries and top planning agency, the National Development and Reform Commission (NDRC), did not respond to requests for comment.
GREEN DREAMS
Aluminum accounts for about 3% of the world’s direct industrial carbon dioxide, according to the International Energy Agency.
For China, this meant that cleaning up the sector would be crucial to its goals, formalized in 2020, of ensuring the country’s carbon emissions peak by the end of this decade and reach net zero by 2060.
Part of the allure of aluminum produced from hydropower or other clean energy is that producers can charge premiums as global manufacturers raise their carbon standards for materials, yet only a small proportion of green aluminum attracts currently this award.
In addition to Hongqiao, producers including industry leader Aluminum Corporation of China, known as Chinalco, were attracted to Yunnan by provincial authorities’ offer of greener energy discounted at 0.25 yuan per kilowatt-hour (kWh), less than half than they were paying in northern China. .
Chinalco announced in 2018 that it would move 1.2 million tons to Yunnan, followed by suppliers including anode producer Sunstone Development. Neither responded to requests for comment.
The new foundries brought in personnel from northern China, with factory canteens serving braised noodles and shaobing, a meat-filled flatbread, to give workers a taste of home.
Factories produce silver ingots cast from molten aluminum in square bundles. These are collected by trucks and delivered to factories to be transformed into goods such as car parts, window frames and beer cans.
A 2022 World Economic Forum report predicted that 2 to 3 million tons of primary aluminum production would shift annually to southwest China, mainly Yunnan, from 2020 to 2025, decreasing to 90,000 to 100,000 tons per year by 2060.
The pace has been much slower.
Authorities were aware that the power was a potential constraint.
“Solving power supply problems is the first thing Wenshan needs to work on to develop a green aluminum industry,” He Chun, deputy head of the Wenshan Energy Bureau, told state media in 2021.
But the rains didn’t cooperate. The Yunnan Water Resources Department said in January that severe drought had persisted for a fifth year, leading to reduced hydropower generation.
On April 16, Wenshan authorities warned of extreme drought conditions in Yanshan County, where several aluminum factories are located, including a Hongqiao smelter. Average rainfall so far this year has fallen by 37%, according to the Wenshan government.
Compounding the smelters’ dilemma, the NDRC in 2021 banned discounted power tariffs for aluminum producers.
‘THERE MAY BE MORE RAIN’
In interviews with Reuters, 10 of the industry figures at smelters moving to Yunnan described higher-than-expected electricity tariffs and periodic orders from the power supplier, China Southern Power Grid, to shut down at short notice.
Electricity rates rose to 0.47 to 0.50 yuan per kWh, seven of these people said, still below what smelters paid in the north.
China Southern did not respond to a faxed request for comment.
Producers such as Yunnan Aluminum, owned by Chinalco, and Henan Shenhuo Coal & Power, neither of which responded to requests for comment, cited Yunnan’s power supply problems in financial filings.
In its 2023 annual report, Shenhuo warned that further increases in electricity tariffs or supply disruptions would create uncertainty for its operations.
Yunnan sought to free up electricity by restricting transfers to other provinces. The provincial government also said it will accelerate the construction of wind and solar energy, as well as more hydroelectric plants, and strengthen its thermal energy capacity, which comes mainly from coal.
But frustrated foundry industry figures talk of looking elsewhere.
“No one dares to follow their relocation plan” because of Yunnan’s energy problems, said a manager at a Yunnan smelter.
Analysts expect more capacity to move to northwest China, where there is more access to energy, including coal, which can ensure a stable supply to smelters.
In May 2023, Weiqiao Chairman Zhang Bo announced plans with 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, Yunnan smelter operators are looking to the sky.
“May it rain more, that’s the best we can hope for,” said a foundry employee.
($1 = 7.2448 Chinese yuan)
(Reporting by Beijing Newsroom; Editing by Tony Munroe and David Crawshaw)
