MELBOURNE (Reuters) - New air pollution laws set to take effect in China next year may cut supply of a vital feedstock for the manufacture of aluminum, bumping up costs for a sector that has been battling with prices near multi-year lows.
Legislators have approved amendments to China's 15-year-old air pollution law that give the state new powers to punish offenders and create a legal framework to cap coal consumption, the Asian giant's biggest source of smog.
The amendments also flag tighter standards for the use of petroleum coke, a byproduct of oil refining and an essential ingredient for the global aluminum industry.
A clampdown on high sulfur petcoke could force global aluminum makers to compete for limited supplies of the low sulfur option, hiking costs, speeding closures and dragging on the share prices of aluminum giants, such as Alcoa Inc, Norsk Hydro and Rusal.
London Metal Exchange aluminum prices hit six-year lows of $1,506 a tonne last month, and are now trading at $1,577 a tonne, less than half the peaks seen in 2008 at the height of the commodities boom.
"There is simply not enough low-sulfur petcoke in the world today to support the global aluminum industry if China stops producing high-sulfur petcoke," said Paul Adkins, managing director of consultancy AZ China.
China produces around 12.5 million tonnes of the 30 million tonne market, he said. Aluminum producers could feel the impact of any cutback as soon as the first quarter of next year, Adkins told the Global Base Metals Forum late on Thursday.
Government authorities plan to revise the classification system for petcoke in October, which will strike off grades that contains more than 3 percent sulfur, Adkins said, effectively curtailing the burning, sale, and import of the material.
Industry is likely to start preparing for a new national standard, to be set out in around 12 months, by increasingly turning to low sulfur petcoke in the coming months, he said.
China accounts for around 55 percent of global aluminum production at 30 million tonnes, requiring some 15 million tonnes of petcoke.
Its smelters may soak up the roughly 2 million tonnes of petcoke sent to global markets, choking off supply to global producers that are already struggling to source the feedstock.
Production of petcoke is diminishing because of changing technology behind refinery practices in the U.S., as it produces more shale gas. Adding to producers' woes, petcoke is difficult to stockpile because of moisture issues, Adkins added.
(Reporting by Melanie Burton; Editing by Tom Hogue)