Chinese aluminum smelters eye Inner Mongolia for low-cost, clean energy

Northwest China, particularly Inner Mongolia, is emerging as a preferred destination for Chinese primary aluminum smelters seeking to shift capacity and benefit from lower electricity costs and abundant clean energy in the region.

Smelters are moving away from their favorite destination, Yunnan, as growing weather woes disrupt its hydropower generation capability, while Inner Mongolia witnesses a rise in wind and solar energy installations.

Smelters' plans to move operations to northwest China also stem from the country's push to lower carbon emissions and increase the usage of renewable energy for aluminum production.

Yunnan has been losing its sheen, with smelters in the province spooked by power supply uncertainty, especially during the "low-water season" -- a period that typically refers to lower rainfall and water availability and stretches from December until April.

Local smelters have faced severe operational disruptions due to electricity supply shortages, mostly during the low-water season. This has posed a hurdle for the province to reach its capacity targets.

Yunnan, which relies heavily on weather conditions for its power supply, has set a total primary aluminum production capacity target of 8.26 million metric tons per year, according to government data.

Advantage Inner Mongolia

Besides access to lower electricity prices with a steady power supply and increasing green power capacity, shorter distances from Inner Mongolia to main consumption areas where produced aluminum is supplied have also worked in favor of the region.

Due to China's dual targets of controlling energy consumption and reaching carbon reduction goals, Inner Mongolia slowed the expansion of primary aluminum capacity from 2018.

At that time, favorable policy support allowed the transfer of aluminum smelting capacity to China's western regions that had the advantage of clean energy and resources.

Thermal power aluminum smelting capacity in Inner Mongolia has reduced over the past few years, mirroring the developments in the Xinjiang region.

Although there are no signs of the restrictions on alumina and primary aluminum capacity additions easing so far, Inner Mongolia and Xinjiang -- among China's top four primary aluminum producers -- have the potential to turn existing aluminum smelting capacity into green capacity, aided by growing installations of wind and solar power facilities, industry sources said.

Inner Mongolia has been a pioneer in creating new models for the consumption and utilization of renewables with a higher proportion. The region has been gradually promoting substitution to green power for energy-intensive enterprises.

Inner Mongolia is also expected to see more alumina capacity come on stream in the years ahead, according to various smelters' plans. Alumina is one of the key raw materials for primary aluminum production.

Xinjiang also provides the advantages of steady thermal power supply and increasing green electricity supply, due to abundant wind and solar energy. However, compared with Inner Mongolia, Xinjiang is farther from the main consumption areas and lacks local alumina production capacity.

Yidian Holding Group, the leading primary aluminum producer of central China's Henan province, has a registered subsidiary in Xinjiang, indicating that the smelter can shift some of its smelting capacity to the region, industry sources said.

Green policy

The demand for green aluminum is expected to strengthen in face of rising international green trade requirements.

As China looks to enroll aluminum smelters into the compliance carbon market, smelters relying on thermal power will face pressure from both production costs and low carbon perspectives. Meanwhile, green aluminum will gain more benefits from the carbon market and be favored.

Over the past two years, China has proposed energy-consuming enterprises switch to green electricity by building high-proportion green electricity supply parks that rely on wind power, photovoltaics and energy storage and utilize nearby renewable energy on a large scale.

To achieve peak carbon neutrality and promote high-quality development of renewable energy, China introduced a weightage target for renewable and green electricity consumption for the primary aluminum sector in 2024 and 2025, according to a government document released earlier in August.

One of the key targets given to China's primary aluminum smelters is that their renewable energy consumption should account for more than 30% of overall energy usage by 2030.

The usage ratio of renewable energy for China's primary aluminum production reached 24.4% at the end of 2023, increasing 13% from 2015, according to the China Nonferrous Metals Industry Association.

As China doubles down on achieving its carbon reduction goals and Yunnan falters, China's primary aluminum industry is set to keep exploring regions that offer high energy savings and provide lower emissions opportunities, industry sources said.