When a bubble bursts, it doesn't take long for the
gas to escape.
As recently as September, much of the aluminum
industry appeared confident that prices would rise in 2009. An
average approaching $3,500 per tonne could be expected,
analysts said with a degree of conformity that was almost
Even when the unraveling of the financial markets
gathered pace with the collapse of investment bank Lehman
Brothers and the bailout of insurance giant AIG, plenty of
observers remained confident that strong fundamentals and a
high cost base would keep aluminum flying high.
How quickly things change. Analysts now are busy
rewriting their aluminum price forecasts for next year, as are
many businesses who are faced with a far worsening outlook for
their financial performances in 2009.
The initial rejection by Congress of the proposed
$700-billion bailout plan seemed to be the event that finally
brought home to analysts and the wider public just how serious
a crisis the world's markets are facing. Confidence in the
growth prospects of the U.S. and European economies has finally
worn thin, and aluminum, copper, steel and other metal markets
are now starting to pay the price.
Of course, much remains unchanged. Long-term, the
factors that underpinned the so-called commodities super-cycle
remain in place. The extra billion or two people in Asia's
emerging markets that are hammering on the door of the global
economy have not disappeared overnight, and their desire for a
Western standard of living-and arguably for aluminum-intensive
goods in particular-remains undiminished.
Cost pressures have not abated either. Oil prices
may have slid, and in doing so have dragged natural gas prices
down with them, but long-term electricity prices, which are
critical to aluminum production, remain historically high.
In fact, the cost of aluminum production is putting
such pressure on smelters that many analysts estimate that
large swathes of the globe's output is uneconomic at prices of
around $2,500 per tonne. That's clearly not sustainable, and
it's likely that we will see further curtailments in the wake
of the closure of Alcoa's Rockdale, Texas, operation last
It will be interesting to see how long the
fundamentals prop up the market and prevent a more dramatic
collapse. Supply deficits can disappear with shocking speed
once consumer confidence takes a dive off the nearest
As always, China remains key, and it may be the
signs of slowing demand in that economy that present the most
danger to the aluminum market. The outlook for China remains
unclear, but what seems certain is that Beijing's priority has
moved from preventing overheating to fighting a slowdown,
especially in the all-important construction markets. The
seeming failure of China's smelters to follow through on a
much-heralded production cut announced earlier this year hasn't
helped sustain prices either.
So what does this new market picture mean for North
America's leading aluminum producers? In short, it's time to
hold on tight and stick to what they know best. For Alcoa and
its dynamic new chief executive officer, Klaus Kleinfeld, the
game plan remains unchanged Take advantage-they even call it
the Alcoa Advantage-of the company's integrated structure to
work on new applications. The pressure to spin off downstream
operations might abate a little in a downturn, too, as those
much-maligned margins could become quite appealing if commodity
prices continue to fall.
For Rio Tinto Alcan and its chief executive, Dick
Evans, there's really no place like home. As the industry
struggles with high costs and low prices, Alcan's captive
hydroelectric power in Quebec becomes even more of a trump
Both companies will no doubt continue to forge
ahead with expansion plans around the world, but with capital
markets down the drain, aluminum prices on the slide and
electricity supply still very much in demand, finding the right
development package might be more difficult than it appeared
just a few weeks ago.
The balloon collapsed quickly, but the sound of the
pop could reverberate for quite some time.
SENIOR VICE PRESIDENT