Aluminum prices have plummeted below smelters
breakeven point and may still have further to fall, leading
market participants to speculate that producers will curtail
capacity in the near future.
The continuing European debt crisis, slower-than-expected
demand from China and an uncertain investment climate pushed
three-month aluminum prices down to $1,841 per tonne in early
August, 21.6 percent below their 2012 peak of $2,349 in late
Analysts estimate that production costs for smelters
generally are between $2,050 and $2,100 per tonne, which means
the majority of smelters worldwide are operating at a loss.
Its pretty clear that a significant portion of
the global smelting sector is operating at a loss,
Nicholas Snowdon, an analyst with New York-based Barclays
Capital Inc., told AMM. We estimate that in the world,
excluding China, youve got nearly 5 million tonnes of
capacity thats unprofitable based on average prices this
Most analysts expect prices to continue falling to the
$1,800- to $1,850-per-tonne range.
The price will drop until companies cut output,
said John Tumazos, an analyst at Holmdel, N.J.-based Very
Independent Research LLC, who said he expects large
output cuts in the coming weeks.
Earlier this year, four producers made smelting cutback
announcements: Pittsburgh-based Alcoa Inc. said it planned to
curtail some 531,000 tonnes of global smelting capacity;
Moscow-based United Co. Rusal said it was mulling a cut of up
to 600,000 tonnes; Montreal-based Rio Tinto Alcan disclosed it
would divest 13 aluminum and alumina assets; and Oslo-based
Norsk Hydro ASA said it would pull the plug on its
180,000-tonne-per-year Kurri Kurri smelter in Australia.
However, producers have followed through on only a few of
their curtailment threats so far. Hydro idled the first potline
at its Kurri Kurri smelter in February and is now working on
shutting the remaining two by September; Rio Tinto Alcan shut
its 182,000-tonne-per-year smelter in Lynemouth, England, in
March; and Alcoa began closing two of its Spanish smelters, its
87,000-tonne-per-year La Coruña facility and its
93,000-tonne-per-year Avilés operation.
Producers hesitation to cut production is
understandableshutting and restarting a smelter is
expensive, and there are headaches that go along with cutting
power contracts short, market participants say.
Record-high Midwest premiums of 10.25 to 11 cents per pound
also have encouraged some producers to delay curtailments.
We havent seen any extreme cuts yet, said
David Wilson, director of metals research and strategy at New
York-based Citigroup Inc.s investment research and
analysis division. This is partially because physical
premiums are high, which is providing some degree of
Snowdon agreed that the record-high physical premiums have
given a boost to smelter margins. We estimate that about
50 percent of physical premiums are ultimately received by the
smelters, he said. Thats about a
$100-per-tonne boost to profitability.
Still, as the price of aluminum slides daily, analysts say
producers cant wait much longer to cut capacity.
Were close to the bottom as were getting to
the pain threshold, Wilson said.
Randy North, director at Toronto-based RBC Capital Markets,
agreed. There is a point at which you have to wave the
white flag, he said. I think were
Rusal confirmed that, pending board approval in September,
it will begin curtailing between 250,000 and 300,000 tonnes of
smelting capacity in the autumn, targeting high-cost facilities
in western Russia and the Urals, and expects to complete
curtailments by the middle of 2013 (AMM, June 26). The future
of Alcoas 150,000-tonne-per-year smelter in Portovesme,
Italy, remains unclear. Alcoa initially planned to permanently
shutter the operation by mid-year, but after bumping heads with
the Italian government it decided to keep it open as it sought
potential buyers. However, Alcoa will start curtailing capacity
at Portovesme if no letter of intent has been signed by Sept.
1. Alcoas 190,000-tonne-per-year smelter in Point Henry,
Australia, is under review.