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 running.
"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 said.
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 cuts.
"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 said.
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 Bulletin.