NEW YORK Politics, not
economics, often play the key role in determining whether
aluminum producers curtail capacity, senior executives at the
worlds leading companies told AMM sister
publication Metal Bulletin.
This has made proposed cutbacks
a sometimes messy battleground with unions and politicians.
The most recent of these fights
played out in Italy, where Pittsburgh-based aluminum producer
Alcoa Inc. just completed the curtailment of its
150,000-tonnes-per-year Portovesme smelter in Sardinia.
The high-cost smelter had been
losing money for some time, plagued by low productivity and
depressed metals prices.
The government is seeking a
buyer for the plant, a crucial local employer, and said it will
significantly subsidize its energy costs to keep it
"We have had a good relationship
with the Italian government in the past, and we still have a
good relationship currently. Good doesnt mean
we didnt have different opinions, but it meant there was
a very intense dialogue and fair way of dealing with each
other," Alcoa chief executive officer Klaus Kleinfeld said.
Positive community relations are
therefore key, particularly when dealing with politically
charged situations, he said.
Few governments wish to see high
unemployment in areas where smelters are located, and they
sometimes opt to subsidize production for as long as is viable
to keep plants running. This was the case in Portovesme.
But despite the best will in the
world, governments will usually reach a limit to the amount of
subsidies per job they can afford to provide.
Alcoa is now challenging a
European Commission decision that Italys extension of
Portovesmes existing electricity tariff after 2005
didnt comply with European Union state aid rules, and
that the company must refund a portion of the benefit.
"The final word on the matter
hasnt been spoken," Kleinfeld said. "Were
challenging the Commissions decision in court, and
well see what comes out of that."
Alcoa has now closed around 14
percent of its global smelting capacity.
Striking the right balance
between politics and economics is often tricky.
The top executive of
Montreal-based Rio Tinto Alcan, which has closed a number of
operations in the past few years, said the company tries to
integrate the best interests of both the local metals and
mining communities and its shareholders.
"Unfortunately we sometimes
reach a time when it no longer makes economic sense to keep a
plant open. When we reach this point, it needs to be shut
down," chief executive officer Jacynthe Côté
Rio Tinto Alcan is also
reviewing its options for exiting the 141,000-tonne-per-year
Saint-Jean-de-Maurienne smelter in France, either through
divestment or closure.
Moscow-based United Co. Rusal
has also begun shutting capacity across its operations in
Russia, sometimes a tricky move given the Russian
governments desire to maintain its work force. Vladislav
Soloviev, Rusals first deputy chief executive officer,
said that geopolitics and costs both play equally critical
roles in the Russian companys decisions on capacity
"Given the very high level of
market price volatility, the balance between deciding whether
to close capacity or not is often very narrow; wed
probably curtail more capacity if it werent for the cost
and geopolitical factors," he said.
Geopolitics was a factor in the
1990s, when producers in the former Soviet Union flooded the
market with materiala move that flattened London Metal
Exchange prices to half of todays depressed levels.
The industry saw a couple of
years of pain, according to Max Layton of New York-based
Goldman Sachs Group Inc., and took some time to react.
The price response was
solidified by a 1994 memorandum of understanding, in which
governments from major producing entitiesincluding the
United States, Norway, Australia, Canada, the European Union
and Russiaall agreed to cutbacks.
Antitrust laws make this
unprecedented move unlikely to ever be repeated, but its
success in breathing life into the ailing mid-1990s aluminum
industry is indisputable.
Right now, low aluminum prices
are "slowly bleeding" cash from producers globally, Layton
Curtailments and closures have
already taken place.
Cuts in China, the largest
producer of aluminum, have largely been the result of producers
there canceling or deferring planned expansions rather than
curtailing existing capacity on a large scale.
Production curtailments outside
of China have also taken place, with major companies like
Alcoa, Rusal, Rio Tinto Alcan and Oslo, Norway-based Norsk
Hydro ASA leading the way.
But their discipline hasnt
been replicated across the rest of the industry, with other
companies only cutting output when faced with disruptions
unrelated to costs.
Assuming the status quo remains,
the slow bleed will continue until some producers are
eventually forced to cut production or go bankrupt,
particularly those with high-cost operations in China and
Europe, Layton said.
"But this will take a while, and
well likely see some of the industry go through more pain
first," he added.
Alcoa estimates that some 31
percent of western smelting capacity and around 34 percent of
Chinese capacity is operating at a loss.
But companies dont just
turn off smelters; they have to evaluate fixed costs first,
such as closure and possible restart costs.
"People are playing the waiting
game as they assess their costs. And at the same time, you have
a time period when suddenly the aluminum price shoots up $400
and people gain hope again and think, Well, maybe it
isnt the right time to cut output. Maybe the market is
just coming back, so lets wait," Alcoas
Kleinfeld said. "But the longer this goes on, the more likely
it is that people are going to take action (to make cuts),
because in the end, theyre going to be bankrupt."
A version of this article
was first published by AMM sister publication Metal