Shanghai aluminium prices down as Henan cuts power fees

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China's top aluminium producing province of Henan has rolled out power subsidies to smelters in a bid to revive output, sources said on Tuesday, causing prices on the Shanghai Futures Exchange to fall over three percent to the lowest in three years.
Henan province, which accounts for about 20 percent of China's total aluminium production capacity, has cut power prices to aluminium smelters by 0.08 yuan per kilowatt hour, exceeding expectations of 0.05 yuan.

The subsidy will cut production costs for smelters by around 1,000 yuan ($160) per tonne, sources said.

"Smelters can now maintain their production due to the subsidy," said a source at the administration department of a large aluminium smelter in Henan.

Some sources said the subsidies are a temporary measure by the Henan government and that the allowances may be claimed back when smelters return to profit.

Electricity makes up 40 percent of aluminium production costs and the bulk of smelters in China, the world's top producer and consumer, use around 14,000 kilowatts to produce each tonne of the metal.

The decision by the Henan government to roll out subsidies came after smelters idled some 700,000 tonnes of capacity in recent months, denting government tax revenues and putting thousands of jobs at risk.

News of the subsidy dragged the most-active October aluminium contract on the Shanghai Futures Exchange (SHFE) down as much as 3.38 percent to 14,990 yuan - the lowest since April 2009, when it hit 14,960 yuan. It was down 2.9 percent at 0725 GMT.

"The Henan news was particularly bearish for aluminium. On top of this, global economics have been a worry for base metal investors," said a Shanghai-based trader.

The fall came precipitously after the exchange reopened following its midday break, with 3,900 lots traded around 1430 local time. Total volume traded on the most active contract was at its highest since October 2011, exchange data showed.

China's annual aluminium production capacity is more than 23 million tonnes, with Henan accounting for 4.6 million tonnes of that figure.