Oversupply forces aluminium industry cuts

February 26, 2014 Leave a comment

Last updated: February 18, 2014 10:56 pm

Oversupply forces aluminium industry cuts

By Xan Rice

Two of the world’s three biggest aluminium producers have announced cuts to production in the latest sign of how weak prices and oversupply are weighing on the industry.

US company Alcoa said on Monday it was shutting its 190,000 tonne-a-year Point Henry smelter in Australia since the plant had “no prospect of becoming financially viable”. Two rolling mills there will also be permanently closed. Alcoa’s total closures or curtailments to production now represent 551,000 tonnes of capacity, or about 1 per cent of world supply of the metal.

At $1,765 a tonne, the London Metal Exchange price for three-month delivery is 43 per cent lower than the 2008 peak, and less than the production cost of many smelters globally. Strong demand for the metal, used in everything from beverage cans to car bodies and construction, has not supported the price because large increases in capacity in China and the Middle East helped to keep the market in surplus from 2007 to 2013. Vast warehouse stocks of aluminium – at least 10m tonnes, much of it tied up in financing deals – have intensified pressure on prices.

But while production in China is estimated to have grown by 6 per cent last year, output elsewhere is now slowly shrinking. Rusal

, the world’s biggest producer, said on Tuesday that its output fell by 316,000 tonnes, or 8 per cent, in 2013. It intends to trim a similar amount this year. Rio Tinto, the second-ranked producer, also recently cut smelting capacity, as did Norsk Hydro. Rusal said cuts in Europe and the Americas amounted to 1.2m tonnes of reduced capacity last year. Analysts said the global market now has a modest supply deficit.

“The trend now is to close higher-cost plants and [to] improve the efficiency of lower-cost ones,” said Andy Shaw, base metals analyst at Credit Suisse. “It is price supportive – but deeper cuts will be needed.”

Some high cost and outdated plants have been mothballed in China and the government has threatened to raise electricity charges for certain smelters as part of its drive to reduce pollution. But the capacity losses have been more than offset by a series of expansions in northern and western parts of the country.

The dire market has been chastening for aluminium companies. Rising labour and energy charges have lifted costs, while the metal price has risen by only 37 per cent since the post-financial crisis low point five years ago. Copper, by contrast, has more than doubled during the same period.

Aluminium producers have been partly protected by record premiums – the amount payable above LME spot price for physical delivery of the metal – which have doubled since November in North America. The current premium of $0.20 a pound is equivalent to $450 a tonne, or a fifth of the all-in-cost for consumers. European and Japanese premiums also surged to new highs.

Gayle Berry, metals analyst at Barclays, said the latest smelter closures and production cuts showed that the producers believed the premiums were not sustainable.

“Finally, real market economics are kicking in and we are seeing the necessary actions to move the market back into equilibrium,” she said.

Even so, few expect a swift recovery in prices. Mike Henry, head of marketing at BHP Billiton, told a press briefing in London that the industry “will continue to be challenged for the foreseeable future”.

“If prices move up, there is a lot of idle capacity that can be brought back to the market, which would likely cap any sustained upside in prices.”

Filed under Macro Trends

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