China is facing a conflict between economic and environmental policies as lower energy prices spur demands for more industrial support.
Regulators have been under pressure to cut power prices this month, giving a boost to struggling industries like aluminum that are weighed down with overcapacity and weakening demand.
On-grid power tariffs, the prices paid to generators, were expected to drop in some regions by 0.03 yuan (U.S. 0.5 cents) per kilowatt hour, according to Bloomberg News.
The reduction seems small, but it would save aluminum smelters 375 yuan (U.S. $59) per metric ton, since power represents more than 40 percent of their production costs, Shenzhen-based Essence Securities Co. said.
Regulators are likely to have plenty of room to cut power prices, since benchmark coal rates have plunged by double- digits from a year earlier to about 400 yuan (U.S. $63) per ton.
The move could keep some hard-pressed aluminum producers from going out of business.
Local authorities in northwest Gansu province have already lowered power prices for state-owned Chinalco's high-cost Liancheng smelter to keep the plant open, according to a Reuters column, citing consultancy AZ China last month.
The problem is that production overcapacity is so severe that companies will try to survive by passing their savings on to buyers and dragging aluminum prices down further, said analysts at Australia-based Argonaut Securities Asia and Shanghai Cifco Futures Co.
The discounts would shave another U.S. $60 (380 yuan) off slumping international prices for aluminum, driving them down to a six-year low of U.S. $1,400 (8,870 yuan) per ton, Bloomberg said.
Aside from the effects on the glutted metals market, the break for China's aluminum makers would boost electricity use, fueled primarily by high-polluting coal.
"This is a classic example of the tension between economic/industrial policy and energy/environmental policy," said Philip Andrews-Speed, a China energy expert at National University of Singapore.
“On the one hand, it can be argued that lower feedstock prices (notably coal) should result in lower end-use power prices. However, one might have hoped that the government would keep the tariffs for the energy-intensive industries at their earlier levels," Andrews-Speed said in an email message.
Aluminum is one of the high energy-consuming industries targeted for conservation measures over the past decade.
China's government ordered differentiated power pricing to discourage further expansion in industries including aluminum, steel and cement as far back as 2004.
The controls did little to discourage excessive investment in construction-related industries during China's building boom that lasted until the property market stalled in 2014.
In the aftermath of China's 4-trillion yuan (U.S. $631-billion) stimulus program launched in 2009, the energy-hungry industries have been left with massive overcapacity.
Around 90 percent of China's aluminum smelters are operating at a loss, AZ China said.
Despite slack demand, China's output of aluminum products increased 8.5 percent through October from the year-earlier period, according to the National Bureau of Statistics (NBS).
Crude steel production is down 2.2 percent. Cement production has dropped 4.6 percent, the NBS said.
The Bloomberg report suggests conflict not only between economic and environmental policies but also within economic policy itself, since further price cuts for aluminum may only leave producers with more losses and glut.
The policy strains come as China's government seeks to support sagging economic growth rates while trying to put the best face on its antipollution efforts before an international climate change conference in Paris next month.
An outline of the government's new five-year plan for 2016-2020 promises to wage an "energy revolution," but it offers few specifics.
"Measures will be taken to control carbon emissions in the energy intensive industries of power, steel, chemical and architectural materials," the official Xinhua news agency said, quoting from the document.
In spite of the environmental consequences, the power price breaks are seen as spreading to other threatened heavy industries like steel.
"I would expect the tariff reduction would be applied to all industries,” Andrews- Speed said. “This can only result in greater energy use and higher levels of pollution, unless the companies fail to sell their products despite offering lower prices."
Same problem for steelmakers
Despite efforts to shed capacity, China's steelmakers face much the same problem as the smelters.
On Nov. 2, the official English-language China Daily said that five of the country's 11 listed iron and steel companies that had reported third-quarter results recorded combined losses of 5.6 billion yuan (U.S. $881 million). Their year-earlier earnings were 1.4 billion yuan (U.S. $221 million), the paper said.
The overcapacity syndrome is mirrored in the power industry. China has continued to add new power plants at a rapid rate, despite a drop-off in demand.
Electricity use this year has grown only 0.7 percent through October, while capacity utilization at thermal power plants fell to 53.7 percent last year, Reuters said in separate reports.
Even after China completes its transition to a services and consumption-led economy, some generating overcapacity will be inevitable.
Consumers draw less power than industry, but they have greater peak load capacity requirements, the South China Morning Post noted last month.
But the huge capacity surpluses in the entire chain of boom-and-bust industries from coal to power, steel, aluminum and cement are symptoms of declining economic growth.
This month, President Xi Jinping said that annual gross domestic product (GDP) growth of 6.5 percent was the minimum needed for China to reach its goal of doubling 2010 GDP by the end of the decade under the 13th Five-Year Plan.
It is unclear whether the government has adopted the minimum as its target, but the trajectory suggests continuing deceleration from the growth rates of 7.3 percent last year, 7 percent in the first half and 6.9 percent in the third quarter of this year.
On Nov. 4, the State Council, or cabinet, announced new guidelines for restructuring state-owned enterprises (SOEs) with participation of investment firms to manage some of their capital and assets.
"The country will also eliminate outdated and excessive capacity of SOEs and dispose of inefficient assets," Xinhua reported.
"State capital will be removed from SOEs, while others will be restructured or upgraded on the basis of innovation," the guideline said.
The reforms could ease overcapacity pressures in the smokestack industries, but the process may be a long one as the government seeks to avoid mass layoffs and deeper declines in GDP.
In the meantime, pressure for indirect support like power price cuts seems likely to continue.
The breaks also pose a thorny theoretical problem for the government, which recently pledged to reduce price controls as part of its reforms.
In September, the State Council said it had reduced its control over prices from 13 categories to seven, preserving price-setting in public service sectors including electricity, natural gas, water for irrigation and postal services.
Given China's surplus of coal, weakening demand and industrial overcapacity, it may be hard to predict what would happen to power rates if all prices were decontrolled.
But in the absence of a significant carbon tax, prices for coal-fired power could fall, perpetuating the cycle of industrial overcapacity, excess production, pollution and losses.
The problems call for a combination of market, regulatory and environmental policies that has yet to be made clear.