Observation on Development of Primary Aluminum Industry in Yunnan Dai Xiying Chief Analyst of Nonferrous Metal Industry China Economic Information Service, Xinhua News daixiying@126.com Zhengzhou, China 17 May 2019

1. Analysis on Advantages of Primary Aluminum Industry in Yunnan 2 1. Analysis on Advantages of Primary Aluminum Industry in Yunnan 2. Assessment of Prospective Primary Aluminum Capacity in Yunnan 3. Analysis on Electricity Cost of Primary Aluminum Industry in Yunnan 4. Development Problems for Primary Aluminum Industry in Yunnan 5. Some Thoughts on Hydropower Aluminum Industry in Yunnan

1. Analysis on Advantages of Primary Aluminum Industry in Yunnan

(1) Clean Energy Yunnan is abundant in hydropower resources, with exploitable installed capacity of 97.95 million kilowatt (97,950MW) which accounts for 25 percent of China’s total exploitable installed hydropower capacity, making it the second biggest hydropower province in the country. From the prospective of energy cost, the trend of hydropower cost is down continuously due to relatively few influencing factors.

(2) Considerable Bauxite Resource & Reserve Yunnan is rich in bauxite, with measured resource of 250 million tonnes. The exploitable bauxite resource and reserve combined is estimated at more than 400 million tonnes in Yunnan. There are also abundant bauxite resources in surrounding areas and adjacent countries, which is an obvious advantage in terms of resource guarantee.

(3) Advantages of Market, Location and Environmental Capacity Western China’s provinces and South Asian and Southeast Asian countries would become the key aluminum markets in the future. With further implementation of China’s Belt and Road Initiative, transportation in Yunnan is gradually improving with more favorable logistic condition. Yunnan has a high level of environmental capacity, with advanced technological equipment and green energy-saving technology for aluminum industry.

(4) Capacity Relocation Opportunity From 2013 to 2017, China issued several Guidance and Action Plans for addressing overcapacity, adjusting industrial structure, relocating capacity and cleaning up illegal primary aluminum projects. The enforcement is unprecedented.

(5) Advantage of Hydropower Aluminum Industry Chain Compared with thermal power aluminum industry, carbon emission and carbon dust emission (per tonne of aluminum produced) from hydropower aluminum industry is down by 12 tonnes and 3.68 tonnes respectively, with a total reduction of up to around 85%. The development of hydropower represents the general trend for global aluminum industry.

2. Assessment of Prospective Primary Aluminum Capacity in Yunnan

The prospective primary aluminum capacity in Yunnan mainly comes from several companies including Yunnan Aluminum, Shenhuo Aluminum, Qiya Metal. According to statistics from Asian Metal, about 3.45 million tonnes of new primary aluminum capacity will be built in 2019, including 1.95 million tonnes in Yunnan province.

Estimated new capacity (10kt) Total designed capacity (10kt) Region Company Estimated new capacity (10kt) Starts in Total designed capacity (10kt) Notes Yunnan Chalco Yunnan Huajiang Aluminum 50 Q4 100 New Yunnan Aluminum (Haixin) 25 70 Expansion 40 Yunnan Shenhuo Aluminum 45 Q3 90 Yunnan Qiya Metal 35 Inner Mongolia Inner Mongolia Chuangyuan Metal 30 Q1 East Hope Baotou Xinhengfeng Energy Q2 Shaanxi Shaanxi Meixin Industry Investment Sichuan Guangyuan Linfeng Aluminum & Power Relocation Guangxi Guangxi Baise Mining Aluminum 130 Source: Asian Metal

3. Analysis on Electricity Cost of Primary Aluminum Industry in Yunnan

(1) Significantly Lower Electricity Cost for Aluminum Company in Yunnan As of Dec 2018, 443 of power generating companies, 7,109 power consumers and 110 power suppliers had been registered at Kunming Power Exchange Center. The scale is among the biggest in China. Transmission-distribution electricity price brackets in Yunnan are at relatively low levels among 33 provincial regions in China, some price brackets are even the lowest nationwide The average electricity price in Yunnan ranked fifth from bottom in China back in 2014, and has been second-lowest nationwide for now, according to the regulatory annual report on China's electricity price in 2017 from National Energy Administration

In order to support the development of industry and commerce, Yunnan government has successively lowered transmission-distribution electricity price and VAT rate for power industry by regulating unreasonable charges four times since 2018, taking advantage of the revenue growth to lower general industrial and commercial electricity price. Total decline from the four price cuts was RMB0.0675/KWh (USD0.01/KWh), a decline of 10%. In Apr 2019, the general industrial and commercial electricity price in Yunnan was down again by RMB0.046/KWh (USD0.007/KWh). In 2018, the energy generated by hydropower in Yunnan was 269.9 billion KWh, accounting for up to 83.2% of total energy generated in the province, ranking second to Sichuan. Yunnan Aluminum’s electricity cost was RMB0.343/KWh (USD0.05/KWh) in 2017, down by 31.5% from 2012’s RMB0.501/KWh (USD0.07/KWh). Based on power consumption of 13,500KWh (per tonne of aluminum produced), the company’s electricity cost was estimated at RMB4,630/t (USD683/t), down significantly by RMB2,133/t (USD315/t) from 2012’s RMB6,763/t (USD998/t).

Preferential price policy According to some special policies, enterprises that build hydropower aluminum projects in Yunnan will enjoy the privilege of getting preferential electricity price. During project’s first five years, enterprises can get preferential electricity price of RMB0.250/KWh (USD0.037/KWh). During project’s sixth to tenth years, preferential electricity price rises by RMB0.012/KWh (USD0.002/KWh) each year to RMB0.3/KWh (USD0.044/KWh) in the final year. Aluminum deep processing project can get preferential electricity price of RMB0.20/KWh (USD0.03/KWh). Henan Shenhuo and Sichuan Qiya’s hydropower aluminum projects with capacity quota in Yunnan already enjoyed the preferential electricity price.

(2) Faster Implementation of Captive Power Plant Policy, More obvious advantage of Hydropower Aluminum in Yunnan Since H2 2018, Shandong government has introduced a series of policies requiring captive power plants in Shandong to pay additional charges. Captive power plants might be forced to pay additional fees for cross- subsidy and government funds in the future, which is expected to directly drive up the power cost.

4. Development Problems for Primary Aluminum Industry in Yunnan

(1) Obstacle to Primary Capacity Relocation There exist difficulties in encouraging enterprises outside Yunnan to relocate their own capacity quota to the province. Market transaction cost for primary aluminum capacity quota remains high.

(2) New Requirement for Resource Supply Guarantee Capacity Resource is becoming a key factor affecting the layout of primary aluminum capacity quota in China. It is predicted that China’s dependency on imported bauxite would remain at 40-50% in the coming two to five years. As the supply of domestic bauxite is tighter with the grade declining, it would be the general trend for imported bauxite to be sold and consumed in Chinese port cities, and more and more primary aluminum plants would build plants in overseas area of resource concentration.

(3) Electricity cost and hydropower demand-supply contradiction Electricity price still is a major obstacle to the development of aluminum industry in Yunnan Unbalanced hydropower generation in Yunnan Preferential price policy contributed to primary aluminum cost difference in Yunnan

(4) Still Lower-end Aluminum Products Yunnan’s aluminum industry is in the early stage of industrial chain, with relatively low added value, and thus is less attractive to companies outside the province.

5. Some Thoughts on Hydropower Aluminum Industry in Yunnan

Strategic target: world-class hydropower green energy resource Introduce policies to promote development of hydropower aluminum industry Ensure a well-organized industrial structure and foster a healthy policy and business environment. Scale is the foundation, deep-processing is the priority and high-quality development is the key Increase coverage of preferential electricity price policy and make sure that all end primary aluminum consumers receive policy benefits Project electricity pricing linked with primary aluminum and alumina prices Introduce safeguard policies for land, funds, taxes, logistic and talents and promote the transition from resource bonus to factor bonus Attract companies with advanced aluminum deep processing technology, offer stronger support for R&D Enhance cooperation with surrounding provincial regions and neighboring countries on bauxite import, production and transportation. Make green hydropower aluminum industry the unique feature of Yunnan’s green energy industry