BANGKOK - Chinese president Xi Jinping signed into law a raft of detailed measures designed to reduce the air pollution that is choking his country on Aug. 29. The new rules cover emissions from automobiles to fireworks and the cremation of human bodies.
In the reams of measures are new regulations on the amount of sulfur that petroleum coke, widely known as petcoke, an essential ingredient used in the production of aluminium, can contain. This could cause fresh headaches for a global aluminium sector already reeling from prices that had fallen to $1,607 per metric ton on Sept. 10 from $2,300 per metric ton in July 2013, according to data from the London Metal Exchange.
Petcoke is a carbon by-product of the petroleum industry used to make anodes required in the aluminium-smelting process. Its lower sulfur (anode grade) versions come from lighter oils. Higher sulfur petcoke (fuel grade), from heavier oils, come from countries such as the U.S., Venezuela and China. These heavier oils can be burned as a cheaper alternative to coal. As coal prices soared, petcoke as an alternative energy source became popular in China.
"Though typically considered inert when it is left unburned and stored, petcoke is in some ways even dirtier than coal when it is burned-with a higher sulfur content," Wang Tao, a researcher at the Carnegie-Tsinghua Center for Global Policy wrote in a recent report.
Petcoke also contains other contaminants, including mercury, arsenic, chromium, nickel and cadmium. "When burned, petcoke also has a greater climate impact than bituminous coal or natural gas," he added.
The report said that petcoke emits 11% more greenhouse gases than coal, and twice the amount from natural gas.
Aluminium has long had the sobriquet "liquid electricity" due to the prodigious amount of power needed to produce the metal when it is smelted from alumina. The production of aluminium thus contributes to the emission of greenhouse gases and global pollution, with most of the power used to smelt it coming from coal.
While this is slowly changing with the rise of clean energy, the aluminium-smelting process is still polluting. About 500kg of petcoke is used to make one metric ton of aluminium. The aluminium industry uses about 25 million tons of the total global petcoke production of 127 million tons. In other words, the aluminium sector uses about $1.4 billion worth of petcoke each year, according to metals and minerals research company Roskill Information Services.
"In the United States, car companies are changing to aluminium from steel for panelling," Paul Adkins, managing director of Beijing-based metals consultancy AZ China told Nikkei Asian Review, noting also that the packaging industry remained the single biggest user of aluminium.
He added that while demand for aluminium is rising only slowly, supply has surged for a range of reasons. Production of bauxite, the ore from which alumina is extracted, has increased as part of the global mining industry's response to surging demand from China.
The Chinese government stimulus measures of 2009-2010 also led to the building of dozens of new smelters which consequently exacerbated the price plunge. And still, aluminium production in China is growing, from 18.4 million metric tons for the first seven months of 2014 to 20.8 million metric tons in the Jan.-Aug. period this year, according to the International Aluminium Institute.
Adding to supply pressures in the sector are improved warehouse delivery rules from the London Metal Exchange that have sharply reduced delivery premiums from over $400 per ton last year to less than $100 now. Traders have also been buying up aluminium to use as collateral to back borrowings. As those deals were unwound, physical aluminium was increasingly offloaded on the market.
But even before the new Chinese anti-pollution laws emerged, stocks of low-sulfur petcoke were already beginning to run down, as newer sources of oil do not produce the right forms of carbon to make anodes, Adkins said. Industry experts said that even without China's new rules, a shortage of low-sulfur petcoke would hit industry before the end of the decade, and probably by 2017.
According to widely accepted international standards for petcoke, 3% sulfur content is the break point between high-sulfur (fuel grade) and low-sulfur (anode grade) versions. But in 2010, China amended its own standards to allow petcoke with 3-5% sulfur into the system for anode-grade coke, which diminished the overall quality of petcoke used by China's aluminium sector.
China could decide to further amend that level, which will have wide-ranging implications for the sector. Violators will have their petcoke confiscated, and will be fined up to three times the value of the petcoke, Adkins noted.
"If [China] uses 3% as the new level then everything changes," Adkins said, adding that China's high-sulfur petcoke imports would stop. Its exports of high-sulfur petcoke would also cease.
"The impact on imports of petcoke is bad enough, but the impact on the domestic market will have a knock-on effect to the international aluminium industry," Adkins added.
China's aluminium industry uses as much as 4 million metric tons of petcoke annually, which contain 3--5% sulfur. If petcoke above 3% are banned from sale or import, that 4 million metric tons will have to come out of the low-sulfur petcoke supply.
China will consume every metric ton it can get its hands on, Adkins said, leaving nothing for exports, thus stripping about 2 million metric tons of low-sulfur petcoke from the international aluminium market.
This is likely to push prices for petcoke up and raise the costs for aluminium producers in the region including companies in Russia, India and Australia. Those companies will then be stuck with lower margins due to the excess supply of the metal.