Beijing shuts smelters to meet energy targets

BEIJING is shutting down aluminium smelters and targeting other heavy industry to meet tough energy conservation targets, posing risks to Australian export prices.

Chinese media reports say smelters representing 5 per cent of China's aluminium production have been ordered to shut down in Henan province alone and industry sources say Beijing is moving on to other provinces that have blown their energy targets.

The energy conservation moves augment or amplify a metals slowdown that was already in train because of stock reductions and slowing end-demand, caused in part by a policy-induced real estate slowdown.

Advertisement: Story continues below "It's a massive nationwide destocking frenzy which is killing prices and killing investor sentiment," said a Shanghai metals analyst.

Real estate transactions have fallen 60 per cent in 14 major cities since mid-April, according to transaction data monitored by Standard Chartered in Shanghai.

Real estate prices and construction activity are expected to follow.

Car industry analyst JD Power said yesterday that preliminary data showed car sales fell in June from May, after doubling in the year to January.

Chinese steel production is falling after massive expansion since early last year, triggering a sharper fall in spot iron ore prices.

Macquarie Group yesterday calculated that the annualised steel production rate fell from 674 million tonnes in April to 651 million tonnes in the first 10 days of June and 645 million tonnes in the second 10 days, amid increasing anecdotal reports of production cuts during the month.

The price of long-steel products, used in construction, is down 12 per cent since April.

Macquarie said steel prices were approaching the marginal cost of production while aluminium and nickel prices were "currently comfortably below".

China's rapid economic recovery almost derailed its energy conservation plans in the year to the March quarter, when two-thirds of provinces increased the amount of energy required to produce each unit of gross domestic product, or energy intensity.

Those provinces are scrambling to order factory closures and mimic central government rhetoric, after Premier Wen Jiabao resolved in May to act with an "iron hand".

"We'd rather sacrifice GDP to ensure we achieve the energy saving and emissions reduction target," Oi Tongsheng, a member of the Ningxia region Communist Party leadership said on Monday, after reports showed Ningxia's energy consumption rose 36 per cent in the year to March. "We should … not mention price, not leave any leeway and never give up," he said.

A Beijing industry source said aluminium smelters in Guizhou, Yunnan, Shanxi and Hubei had also being asked to cut production.

"It's all about the end of the 11th five-year plan," he said, referring to a target to reduce energy intensity by 20 per cent.

"But the approach to smelters has been couched in terms like 'do this for us now, to appease Beijing, but you will be able to resume full production in 2011'.''

There are some signs that policymakers may soon be satisfied that China's slowdown has gone far enough.

The HSBC PMI survey fell from 52.7 to 50.4 last month, signalling that the manufacturing sector was only barely expanding.

"NDRC (National Development and Reform Commission) officials made it explicit that local officials are not being strictly held to energy targets, suggesting they've got what they needed in terms of slowing down," said an investment banker, referring to recent meetings in Beijing.

A senior official at the Ministry of Industry and Information Technology told a recent green energy conference that industry accounted for 70 per cent of China's energy use.

This is the inverse of most developed countries, where households consume about 70 per cent of energy.

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