Metals prices may have come off in the wake of fears over continued tightening in China, Greek debt default and wider worries over stalling global growth, but strangely for some metal (such as aluminum and zinc) the weather may be one factor that supports metal prices in Q3.
A Reuters article explains how the worst drought to hit central China in fifty years has brought water levels to critical levels at some of the country’s biggest hydro-electric power plants and could exacerbate the normal power shortage problems expected during the summer period. Water levels at the 26.7 GW Three Gorges Dam have dropped to 152.7 meters, below the 156-meter low-watermark limit to efficiently run the turbines. The water level is likely to fall further, possibly to 145 meters by June 10 as spillways are opened to increase supply downstream, intended to save the early spring rice harvest facing devastation due to low water levels.
According to the article, 1,392 reservoirs in Hubei province alone are too low to generate electricity at all, just when hydropower should be ramping up to peak production in the summer months. Hydropower usually hits a low in January-February as snow holds back water supply and replenishes reservoirs before the spring melt. This year, the Yangtze at midstream is 6 meters lower than it was at the same time last year, following rainfall of only a fifth of the usual levels.
Hydropower in Hunan is reported to have already fallen to 55 percent of normal production back in April, and almost half of Hunan’s electricity-hungry silicon-making facilities have suspended work. So far, the impact on zinc and aluminum production has been limited, sheltered as the larger producers are by local governments; but this summer will be critical and smelters may well find themselves caught between the pincer movement of power rationing and Beijing’s drive to reign in excess aluminum capacity. The authorities have repeatedly urged restraint in building new smelters and have recently tried imposing environmental targets in an effort to close smaller, less efficient plants largely to no avail; owners have just invested in more modern plants and produced even more metal.
If power shortages begin to seriously impact production as expected, both zinc and aluminum production could be hit. A proportion of aluminum smelters have captive coal-powered generating capacity so closures will be selective and some regions will likely be impacted more than others, but a measurable impact on total production is all that is required to impact prices. If the country is forced to start importing aluminum, expect that support to rise rapidly. China was a net importer of just 72,000 tons of primary aluminum in the first quarter — figures for Q2 and Q3 could tell an entirely different story.