China, the world"s largest aluminium producer, is still running short of primary metal. The country imported another 140,000 tonnes in October, bringing the year-to-date total to 1.27 million tonnes. Multiple Chinese smelters have been ordered to reduce or curtail production as provincial governments try to meet quarterly energy usage and efficiency targets. China"s national output of aluminium peaked in February, when it was running at an annualised rate of 39.7 million tonnes. The International Aluminium Institute (IAI) estimates it was 38.5 million tonnes in October. The price incentive is there. LME three-month aluminium is currently trading around $2,640 per tonne, off October"s 13-year peak of $3,229 but still at a historically elevated level. But carbon is now as important as price for most producers, a collective green pivot that is muting the supply response to low stocks and high prices. SMELTER TROUBLE Aluminium production outside of China rose by a marginal 1.7% to 21.97 million tonnes in the first 10 months of this year, according to the IAI. October"s annualised run-rate was just 271,000 tonnes higher than December 2020. Unforeseen supply hits have played their part in restricting growth despite a step-change higher in the aluminium price. A protracted strike at the Kitimat smelter in Canada - resolved in October - has dented North American production, which fell by 1.8% over January-October. High gas and energy prices in Europe are constraining regional smelter production, which was running at an annualised 3.29 million tonnes in October, down from in excess of 3.40 million in both April and May. But there hasn"t been much in the way of new capacity coming online either. That"s a result of the low pricing environment of the last decade, which was characterised by China"s over-production and high exports. The largest single addition this year has been the full commissioning of the Samalaju Phase 3 smelter in Malaysia, a 320,000-tonne per year capacity boost for owner Press Metal (PMET.KL). The ramp-up of the plant has fuelled an 8.9% increase in Asian output in the first 10 months of the year. Only Latin America registered higher growth of 16.4% but that reflects the partial curtailment of two smelters in the first half of 2020 - Brazil’s Albras (fire) and Argentina’s Aluar (COVID-19). GREEN CAPACITY It"s worth noting that Press Metals" smelters are predominantly supplied by hydro power from the Sarawak State grid. Carbon is emerging as a key differentiator in the aluminium market as producers respond to growing demand for green metal. It is also currently defining how producers are investing their capital in new smelters and capacity restarts. The single largest addition to non-Chinese supply next year will be the new 428,500-tonne per year Taishet smelter in Russia, a hydro-powered build-out of Rusal"s green aluminium portfolio. Rio Tinto (RIO.L) announced in November a 26,500-tonne expansion of its AP60 smelter in Canada, which, according to the company, "produces some of the world"s lowest carbon aluminium with renewable hydro power here in Quebec". Hydro power is why Alcoa (AA.N) is next year reactivating 268,000 tonnes of idled capacity at the Alumar smelter in Brazil. The restart is predicated on being able to secure what the company describes as "competitive, renewable, power arrangements" from Brazil"s hydro-electric systems. Wind and solar power will help reenergize 35,000 tonnes per year of idled capacity at the Portland smelter in Australia. It was last operated in 2009. Alcoa was considering closing the plant completely last year but a new energy deal with three suppliers will underpin a move to lift Portland"s renewable energy share from a current 30% to 50% by 2030. Just about all the new capacity coming on stream outside of China next year is going to be low-carbon metal. If green is the only colour, restarting old smelters powered by fossil fuels doesn"t make a lot of sense. Moreover, producers are simultaneously investing heavily in greening their existing operations. Rusal , for example, is embarking on what it terms "an unprecedented overhaul program" at its higher-carbon plants, converting them to pre-bake anode technology with a target of cutting energy usage by 20%. The rebuild work will take until 2030 to complete. RECYCLING Investment is also flowing into more recycling capacity. Recycling is a core component of the aluminium industry"s commitment to lower its carbon footprint but it"s also a reflection of a shifting regulatory landscape around "scrap" metal. Destination countries such as China are pushing back against lower-grade scrap imports and origin countries, particularly European, are looking to tighten scrap export rules. Norwegian producer Hydro (NHY.OL) has this year announced three scrap-based expansions at its European extrusion plants and a new 120,000-tonne per year recycling facility in Michigan. PRIMARY SQUEEZE Scrap, however, can"t be delivered against the LME"s primary aluminium contract. It"s the primary metal part of the global supply chain that is currently being challenged, both in China and everywhere else. That"s because smelting aluminium is the most carbon intensive part of the supply chain and the source of power is the biggest carbon variable. So far at least, the West"s response to China"s aluminium production slowdown has been directed almost exclusively down green channels. However, there is only so much renewable power available and there are many other industrial sectors as hungry for it as aluminium. Such Western constraints put the supply focus back on China, where there is plenty of new smelter capacity that could start up but can"t due to a lack of power capacity. Carbon is again the culprit for China"s producers, most of which use coal to power their smelters. That leaves the global primary aluminium market increasingly sensitive to Beijing"s quarterly and annual decarbonisation targets. And the rain. Drought in hydro-rich Yunnan province earlier this year curtailed production in what is a fast-growing low-carbon aluminium hub. Aluminium traders didn"t used to think much about the weather in pricing the market but in a green hydro-rich world that may change.