China has set a more modest goal for its metals industry to reach peak carbon emissions as the world's biggest aluminum producer faces multiple headwinds in its pivot away from coal.

Beijing has pushed back its target year to peak the nonferrous metals industry's carbon emissions to 2030 and will curb smelting capacity, increase metals recycling and boost renewable energy use to meet the climate target, according to an action plan released Nov. 15 by the Ministry of Industry and Information Technology, the National Development and Reform Commission and the Ministry of Ecology and Environment. The new target is five years later than the goal set in its 2021 draft plan.

The country's carbon-intensive aluminum sector is key to meeting the climate target — and it now faces a dilemma.

More than 75% of CO2 emissions from China's metals industry came from the aluminum industry, and 82% of the energy used in domestic primary aluminum production came from coal in 2021, compared to a total world average of just 57%, data from the International Aluminium Institute showed. Additionally, more than 60% of China's aluminum capacity is powered by captive coal-fired power plants, according to the Ministry of Industry and Information Technology.

To cut reliance on coal, Chinese aluminum smelters have moved to hydropower-rich regions, putting additional pressure on regional energy systems. Local governments have since forced aluminum plants to slash production to prevent grids from overloading during recent heat waves and droughts.

"It is very hard to reduce the proportion of coal-fired power due to the insufficient renewables supply in most provinces, [unstable] power supply of renewables and higher energy costs," said Liu Jie, managing consultant of the aluminum value chain at Wood Mackenzie.

Obstacles to decarbonization

The new 2030 goal seems to be more realistic, as China's aluminum sector needs more time to increase its use of renewables other than hydropower.

The action plan said renewables' share in the energy mix of aluminum production should exceed 25% by 2025 and surpass 30% by 2030. China also vowed to increase recycled metals production to 24% of total domestic nonferrous metal supplies by 2025, with annual secondary aluminum output expected to top 11.5 million tonnes during that period.

Aluminum smelting is energy-intensive, making decarbonization the biggest challenge for the sector, Yang Muyi, senior electricity policy analyst at Ember, said in an interview.

Yang said it is unrealistic to expect aluminum smelters to replace captive coal power plants with renewable energy facilities because the latter require large parcels of land, and shutting down existing plants runs the risk of electricity price spikes.

Given these hurdles, capacity relocation to hydropower-rich regions has become the key solution. The most popular destination is Yunnan province, which sources nearly 80% of its electricity from hydropower.

But there's a question mark over Yunnan's capacity to meet future energy demand, so aluminum majors are likely to defer relocation plans.

"Aluminum smelter projects are usually constructed and commissioned at such a rapid pace that it has greatly outpaced the construction of the supporting hydropower systems," Wood Mackenzie's Liu said. "So the market has to revise down the expectation of the commissioning speed of Yunnan projects."

Yunnan's aluminum capacity has grown to 6 Mt/y, and China Hongqiao Group Ltd. and Yunnan Aluminium Co. Ltd. plan to relocate a total of 2.81 Mt/y capacity to the province in 2023. If all projects go into production as planned, Yunnan's energy demand could grow by 8% yearly in 2023 and 2024 and touch the ceiling of the local energy system, which is already under seasonal pressure from drought, Zhongtai Securities analysts Xie Honghe and Liu Yaoqi wrote in a Nov. 21 note. The analysts project Yunnan will only add 380,000 tonnes of capacity next year.

Pathways to peak emissions

Still, some analysts believe China's aluminum sector could overcome these challenges and reach peak emissions before 2030.

Wood Mackenzie expects China's primary aluminum sector will beat that target amid efforts to increase renewables and reduce energy intensity, Chen Xinlin, a senior consultant at the research firm, said.

"The most impactful [policy] is capacity regulations," Chen said. China has capped aluminum capacity at around 45 Mt/year, which is widely regarded as a hard limit for China's effective capacity, with no signs of easing, Chen said.

Renewable investment from the private sector could boost renewable energy adoption, while power tariffs could help lower costs for grid-powered smelters.

The government provides subsidies to encourage the private sector to invest in non-hydro renewable projects, such as solar and wind. Aluminum smelters that use non-hydro renewables for over 15% of their energy mix also enjoy lower power tariffs, according to Liu.

Aluminum-makers might shift production outside China with the ongoing capacity and environmental restrictions.

Chinese companies are likely to develop more greenfield aluminum smelter projects in Southeast Asian countries, especially Indonesia, Malaysia and Vietnam, Chen said. Those countries have great advantages, such as resources, location and policy, for developing sophisticated aluminum industries.

"Despite the challenges such as stiff environmental constraints, and underdeveloped infrastructure and business environments, Southeast Asia remains the top choice for Chinese investors — including new entrants — to develop new aluminum smelting capacity," Chen said.

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