ALUMINIUM smelters in China’s southwestern Yunnan province have started to ramp up production as curbs on power usage are relaxed after a recent recovery in hydropower output, an analyst who visited the province last week told Reuters.

The aluminium market has been watching weather forecasts in Yunnan, China’s fourth-largest producing region for electrolytic aluminium, where reduced hydropower generation meant idled production capacity for many months.

Hydropower accounts for about 70 per cent of total power supply in the province, which has about 5.25 million metric tons of aluminium-making capacity.

“Most aluminium smelters in Yunnan are actively ramping up their production,” said Li Lin, aluminium director at Chinese consultancy Aize, estimating that as much as 2.35 million metric tons of capacity would gradually come back online.

Analysts had previously expected between 1 and 1.3 million tons of production to resume in the Yunnan region during the summer months.

Restarting aluminium production is costly but Yunnan smelters benefit from relatively cheap hydropower energy, and their production costs, according to Li’s estimate, are nearly 4,000 yuan (S$745.65) lower than the June price of a metric ton of aluminium.

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Benchmark aluminium prices are down 10 per cent so far this year to US$2,149 per metric ton on the London Metal Exchange. The August contract on the Shanghai Futures Exchange gained 0.7 per cent to 18,120 yuan on Monday.

Macquarie analysts expect Yunnan to gradually resume 50 per cent of its total curtailed capacity in June-August.

Higher supplies will increase inventories in China in coming weeks, according to traders, and may pressure regional prices for the metal used in transport, construction and packaging.

However, much depends on the stability of power supplies.

“We believe low dam (water) levels will still lead to power shortages over summer, thus limiting growth in production,” analysts at ANZ said in a note. REUTERS