Komesaroff examines a spate of aluminium smelting expansions in the Xinjiang Uyghur Autonomous Region, where production costs are much lower than elsewhere in China. For example, the average electricity tariff paid by China’s aluminium industry is ¥505 per MWh, but in Xinjiang smelters can source electricity for as low as ¥150 per MWh, a saving of ¥4,700 per tonne of metal.
Beijing has long tried to rein in excess aluminium expansion capacity. As far back as 2002 the government replaced VAT rebates on aluminium exports with an export tax. This was followed by power-tariff surcharges and instructions to local governments that they should not approve any new aluminium projects. But these initiatives had little effect as aluminium production grew at stellar rates.
Four factors account for the meteoric rise of China’s aluminium production in the face of this opposition. First, because more than half of smelters are wholly or partially owned by local governments, they received generous subsidies and privileged access to essential resources, especially electric power. Second, as power tariffs escalated in the past five years, technical innovations helped alleviate the higher costs. Third, by investing in the power stations that supply electricity to their smelters, producers bought some assurance of uninterrupted electricity supplies. Finally, thanks to their experience of building smelters, China’s engineers can construct new plant for just one-third of the standard international cost. (Kamesaroff, supra, at 8).
Despite these changes, Kamesaroff notes that costs have increased enough to reduce industry margins below 4% (ibid, 9). The resulting ban on bank lending for aluminum production came with an important exception--production in Xinjiang and other western regions.
"China’s leaders are especially keen to develop Xinjiang, which has enormous coal and mineral reserves, not to mention a troublesome ethnic population that needs to be controlled and mollified." (Ibid.). Chalco's decision to invest heavily in a large smelter with integrated electric power station has had some economic effect--Kamesaroff explained that the
decision by Hunan’s Zengshi Group to invest Rmb3.5 bn in a downstream aluminium rolling mill employing 3,000 people is further reason to conclude that Beijing will not interfere with Xinjiang’s expanding aluminium industry. Downstream processing is exactly the sort of labor-intensive, low-energy, value-adding industry that Beijing wants to encourage as it tries to restructure away from energy-intensive sectors. " (Ibid.).
Additional investment is planned by Shenhuo Coal and Xinfa Aluminum Group. And indeed, the combination of coals and aluminum is precisely what may help drive costs down enough to make additional aluminum production worthwhile. Kamesaroff, though, notes two problems with the westward migration of aluminum production. The first is the need to ship alumina and cryolite form Eastern China. The second is water scarcity in Xinjiang. But local incentives have reduced these obstacles significantly.