BEIJING, May 10 (Reuters) - Erratic rainfall in China's

southwest is frustrating a multibillion-dollar push to green an

aluminium industry that accounts for almost 60% of global output

and, by some estimates, emits more carbon dioxide than

Australia.

Lured by official promises of cheap hydropower, China

Hongqiao Group ( CHHQF ) and a handful of other coal-reliant

smelters several years ago began moving 6.56 million metric tons

of capacity - about 15% of China's total - from the northern

rust belt to the mountainous and ethnically diverse Yunnan

province, known for tea, coffee and wild mushrooms.

The opportunity to cut electricity bills and help the world's

top polluter tackle global warming seemed like a safe bet. But

as Yunnan's rivers and reservoirs dwindled amid poor rainfall,

which some experts attribute to climate change, so did the

reliability of electricity.

Reuters interviews with almost two dozen industry figures

and analysts, as well as company filings and official documents,

found insufficient hydropower has meant that only a little over

half of the planned aluminium capacity shift has materialised.

Some smelters are slowing or scaling back their already-delayed

plans and others are seeking alternative locations.

"The power cuts in the past two years have made it clear

that Yunnan can't be sustained as a major producing region,"

said one Yunnan industry figure who, as with others, spoke on

the condition of anonymity due to the issue's sensitivity.

Despite growing demand for low-carbon products and strong

industry profits in recent years, eight employees at four Yunnan

smelters said they have had to cut production by 10% to 40%.

Muyi Yang, an adjunct fellow at the University of Technology

Sydney who researches energy policy, said any supply disruptions

would delay China's broader energy transition because aluminium

is used in many clean technologies.

In addition to hindering China's climate goals, the hydro

crunch has caused volatility in global aluminium prices and

imperilled the potential for producers to cash in on demand for

"green" metal, according to the analysts and industry sources.

Hongqiao's plan to move almost 4 million tons of production

from Shandong province to Yunnan involved building two plants

near the Vietnam border, in Wenshan and Honghe prefectures, each

with capacity of roughly 2 million tons.

The 17 billion yuan ($2.35 billion) Wenshan factory opened

in 2020 and was intended to reach full capacity in August 2022,

the director of the industrial park where it is located told

state media in 2021. But unstable hydropower has prevented that,

two industry figures said.

At Honghe, production was due to begin in March 2023,

according to a December 2021 overview of projects published by

the Yunnan Department of Industry and Information Technology.

Yet, initial production capacity of just 500,000 tons will be

ready in the middle of this year, according to a person familiar

with the matter.

Chen Xinlin, a senior metals and mining consultant at Wood

Mackenzie, said Honghe's capacity may not be commissioned this

year due to the "hydropower bottleneck".

Hongqiao and its parent, Shandong Weiqiao Pioneering Group,

did not respond to Reuters questions about the matter, and the

Yunnan government declined to comment.

China's environment and industry ministries, and the top

planning agency, the National Development and Reform Commission

(NDRC), did not respond to requests for comment.

GREEN DREAMS

Aluminium accounts for about 3% of the world's direct

industrial carbon dioxide, according to the International Energy

Agency.

For China, that meant cleaning up the sector would be crucial to

its goals, formalised in 2020, of ensuring the country's carbon

emissions peak by the end of this decade and reach net zero by

2060.

Part of the allure of aluminium made from hydropower or

other clean energy is that producers may be able to charge

premiums as global manufacturers raise their carbon standards

for materials, though only a tiny proportion of green aluminium

currently attracts such a premium.

Besides Hongqiao, producers including industry leader

Aluminium Corporation of China, known as Chinalco,

were drawn to Yunnan by provincial authorities' offer of

discounted greener power at 0.25 yuan per kilowatt hour (kWh),

less than half of what they were paying in northern China.

Chinalco announced in 2018 that it would move 1.2 million

tons to Yunnan, and suppliers including anode producer Sunstone

Development followed. Neither responded to requests

for comment.

The new smelters brought in staff from China's north, with

factory canteens serving braised noodles and shaobing, a

flatbread stuffed with meat, to give workers a taste of home.

The plants produce silver-coloured ingots cast from molten

aluminium into square-shaped bundles. These are collected by

trucks and delivered to factories for processing into goods such

as car parts, window frames and beer cans.

A 2022 World Economic Forum report anticipated that 2 to 3

million tons of primary aluminium production would move annually

to China's southwest, mostly Yunnan, from 2020 to 2025, tapering

to 90,000 to 100,000 tons per year by 2060.

The pace has been much slower.

Officials had been aware that power was a potential

constraint.

"Solving power supply issues is the first thing Wenshan

needs to work on to develop a green aluminium industry," He

Chun, deputy bureau chief of the Wenshan Energy Bureau, told

state media in 2021.

But rains proved uncooperative. Yunnan's Water Resources

Department said in January that severe drought had persisted for

a fifth year, leading to reduced hydropower generation.

On April 16, Wenshan officials warned of extreme drought

conditions in Yanshan county, where several aluminium plants are

located, including a Hongqiao smelter. Average rainfall so far

this year is down 37%, according to the Wenshan government.

Adding to the smelters' dilemma, the NDRC in 2021 banned

discounted power rates for aluminium producers.

'MAY THERE BE MORE RAIN'

In interviews with Reuters, 10 of the industry figures at

smelters that moved to Yunnan described higher-than-expected

electricity rates and periodic orders from the energy provider,

China Southern Power Grid, to shut down on short notice.

Electricity rates had risen to 0.47 to 0.50 yuan per kWh,

seven of these people said, still below what smelters paid in

the north.

China Southern did not respond to a faxed request for

comment.

Producers including Chinalco-owned Yunnan Aluminium

and Henan Shenhuo Coal & Power, neither

of which responded to requests for comment, have cited Yunnan's

power-supply problems in financial filings.

In its 2023 annual report, Shenhuo warned that further

increases in electricity rates or supply disruptions would

create uncertainty for its operations.

Yunnan has sought to free up electricity by curbing

transfers to other provinces. The provincial government has also

said it will accelerate construction of wind and solar power, as

well as more hydropower stations, and bolster its capacity for

thermal power, which mainly comes from coal.

But frustrated smelting-industry figures talk of looking

elsewhere.

"No one dares to stick with their relocation plan" because

of Yunnan's power issues, said a manager at a Yunnan smelter.

Analysts expect more capacity to shift to northwestern

China, where there is more access to power, including from coal

that can assure stable supply for smelters.

In May 2023, Weiqiao's chairman Zhang Bo announced plans

with Shandong Chuangxin Group to build a green aluminium base in

Inner Mongolia, powered by wind and solar, according to a

statement on the regional government's website.

For now, Yunnan smelter operators are looking to the skies.

"May there be more rain, that's the best thing we can wish

for," said one smelter employee.

($1 = 7.2448 Chinese yuan renminbi)