Cleaner Grid, Bigger Risk: China’s Aluminium Test

Chinese aluminium exports have risen ~10% year-on-year YTD, benefiting from both a loss of Middle Eastern volumes and strong smelter margins due to weak alumina and firm aluminium prices. Meanwhile, Chinese aluminium production stood at ~23 Mt in 1H26, which annualizes to ~46 Mt, already above the country’s self-imposed 45 Mt cap. With utilization already at ~99% and a strong El Niño developing, the 2023 comparison suggests that we cannot rule out a supply shock triggered by another Southwest China drought.

According to MySteel, China currently possesses 46.1 Mt of completed aluminium capacity, of which 45.2 Mt was operational as of May 2026. Inner Mongolia province has the largest capacity with 7.1 Mtpa capacity, followed by Yunnan (6.8Mtpa) and Xinjiang (6.6Mtpa). Yunnan has the cleanest grid in the sector thanks to its reliance on hydropower, making it both the main destination for relocation and decarbonization, and the most exposed to rainfall, while the others remain heavily coal powered for now. Together, Shandong, Xinjiang, Inner Mongolia and Yunnan account for ~58% of total capacity.

Yunnan’s smelters emit ~0.7 tonnes of CO2 per tonne of aluminium on a Scope 2 basis, versus more than 11 tonnes per tonne in northern provinces like Shandong and Inner Mongolia, Fastmarkets reports. Yunnan sources ~70-80% of its energy from hydropower, according to Nikkei Asia, and the 2023 drought forced smelter shutdowns of up to 40% in the province. International Aluminium Institute data shows that hydropower’s share of the aluminium sector’s national power mix has roughly doubled since 2013, from ~10% to ~19%, even as production rose 66%.

This is precisely the tension in China’s decarbonization strategy: the same relocation drive that lowers carbon intensity also concentrates risk. Beyond the multi-year weather cycle, Yunnan faces seasonal disruption too, with hydropower output falling to less than 60% of wet-season (June-September) levels during the November- April dry season. Despite this, capacity has kept migrating to Yunnan because it’s the cleanest option, up from 5.6 Mt of completed capacity in July 2023 to 6.8 Mt in May 2026 according to Mysteel. This means that a repeat of 2023 would now hit a larger, more concentrated base than it did last time, with a correspondingly larger impact on flows.

Some of this pressure may be offset elsewhere. Redirection triggered by prior droughts has partly gone to Inner Mongolia and Xinjiang’s growing wind and solar buildout rather than back to coal, capping the carbon cost of diversifying away from Yunnan. But wind and solar carry their own intermittency and lack hydro’s dispatchable baseload, so this shifts the risk profile rather than removing it.

With the ongoing war, aluminium exports are likely to make up a larger share of output, which, alongside potential El Niño-driven production disruptions, may tighten the domestic balance. Indonesia’s domestic smelting and alumina capacity, built by Chinese firms and largely coal-powered, may help fill that gap without the same rainfall exposure. Both of these manifest as a net positive for geared tonne-mile demand. Notably, a Yunnan-driven aluminium supply shock doesn’t directly reduce bauxite flows, since Yunnan has only ~1.6 Mtpa of alumina refining capacity. National alumina refining is concentrated in coastal, coal-powered provinces such as Shandong, Shanxi, Guangxi, and Henan, largely insulated from Yunnan’s hydropower risk. Nonetheless, a large enough shock would cut Yunnan’s alumina demand, impacting refining and bauxite imports elsewhere in the country. As alumina refining concentrates further in hydropower regions, it increasingly runs like a renewable-to-hard-asset conversion, scaling with cheap power rather than steady demand, pointing to greater volatility in production and bauxite imports over time.

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