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The Chinese government’s campaign to reduce smog pollution and whittle down excess production is set to take around a tenth of its aluminum smelting capacity out of the market by the year-end, potentially adding fuel to a months-long price rally.

That impact could have been even more severe - if the world’s largest aluminum producer, privately-held China Hongqiao Group, had been forced to cut output by 30 percent this winter. But, in an apparent reprieve late last week, its cuts are likely to be far less than that.

China last year accounted for over half the world’s annual primary aluminum production of almost 59 million tonnes, according to the London-based International Aluminium Institute.

It has annual aluminum smelting capacity of 45 million tonnes, according to consultancy CRU. New capacity has still come on line in China this year, even as illegal, unlicensed capacity has been shut down.

A Reuters survey of six consultancies and brokerages last week, before the Hongqiao news, showed that up to 1 million tonnes of the light metal, used in making cars and white goods, could be cut during the 4-month heating season in northern China, which begins in mid-November, in the country’s first winter restrictions on aluminum.

That works out at as much as 3 million tonnes on an annualized basis and is on top of the 3-4 million tonnes of annual capacity estimated to have closed permanently this year as part of a crackdown on facilities built without necessary permits.

The prospect of supply cuts in China has roiled markets, particularly in the eastern province of Shandong, home to several smelters including Hongqiao, which will shoulder 80 percent of the winter cuts, according to Wood Mackenzie analyst Ami Shivkar.

Chinese aluminum prices hit 6-year highs above 17,000 yuan ($2,581.74) per ton in August, and are on track for their best annual performance in eight years, as investors have bet that government policy will help trim a global glut that has dampened prices for years.

BEIJING BACKLASH?

The Chinese government has told 28 northern cities, including Binzhou and six others in Shandong, to take stringent steps to curb smog this winter.

Among these is a requirement for smelters to cut primary aluminum production by at least 30 percent.

However, an order on Friday by the city of Binzhou, where Hongqiao is based, for smelters to reduce operations this winter appeared less stringent than had been expected.

The city’s plan includes in its calculation illegal pots that Hongqiao has already closed. The company shut 2.68 million tonnes of illegal annual capacity by end-July.

That means it will now only have to shut another 900,000 tonnes of annual operational capacity over the winter months, estimates CRU consultant Jackie Wang.

Hongqiao “will need to close a lot less than previously thought,” noted Victor You, an analyst at CLSA in Hong Kong, who had calculated a 30 percent Hongqiao reduction at nearly 2 million tonnes.

Hongqiao did not respond to a request to clarify how much it was cutting this winter.

Standard Chartered analyst Paul Horsnell said in a client note that the let-off “essentially creates an issue of moral hazard and threatens the integrity of cuts to both illegal capacity and the winter heating season.”

He warned of a central government backlash “to a policy guideline that effectively means Hongqiao benefits from its development of illegal capacity.”