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Alcoa may cut output as prices continue dive

Keywords: Tags  Alcoa, Chris Ayers, smelter capacity, production cuts, idling, permanent shutdowns, Lloyd O'Carroll, John Tumazos Charles Bradford


CHICAGO — Alcoa Inc. is considering cutting as much as 460,000 tonnes of smelter capacity over the next 15 months as aluminum prices remain stubbornly low.

The Pittsburgh-based aluminum producer said May 1 that it would focus its efforts on higher-cost plants, including those facing power issues or "regulatory uncertainty."

The possible curtailments could impact about 11 percent of Alcoa’s global smelting capacity, according to the company, which has already idled 586,000 tonnes, or 13 percent, of its smelting capacity.

"Because of persistent weakness in global aluminum prices, we need to review every option to maintain Alcoa’s competitiveness," Chris Ayers, president of Alcoa’s global primary products segment, said in a statement.

Options under consideration include discontinuing pot relining, plant closures and permanent shutdowns, Alcoa said. The company said it also is reviewing its alumina refining system.

Any decisions will be announced as facility reviews are completed, Alcoa said, without mentioning specific regions or facilities.

The company’s review will take power costs into account first, as well as labor costs, supply contracts, and government policies and incentives, market observers said.

Analysts and market observers agreed that Alcoa was responding appropriately to low aluminum prices. Most agreed that cuts, while possible anywhere, were most likely to be focused in Europe—because of high power costs, a strong euro compared to other currencies, and politics seen as unfriendly to manufacturing—and perhaps Australia, where a strong dollar and carbon taxes are hampering competitiveness.

Alcoa’s announcement represents a shot across the bow to not only suppliers, utilities, unions and governments, but also to other producers, who are effectively being urged to make similar moves, sources said.

"Rational action is, if a smelter is not cash-flow positive at a price, then it should be shut down. That is the way Alcoa has approached it in the past, and I think that is the rational thing that Alcoa and other producers should be doing in this environment," Davenport & Co. LLC analyst Lloyd T. O’Carroll told AMM.

Some sources speculated that the move could bolster aluminum prices.

The cash primary aluminum contract on the London Metal Exchange ended the May 1 official session at $1,788.50 per tonne, down 3.1 percent from $1,846.50 per tonne the previous day and off 15.8 percent from a 2013 high of $2,123 per tonne on Feb. 15.

"This is a logical reaction to where current aluminum prices are and various pockets of weakness in different parts of the world," said John Tumazos of Very Independent Research LLC. "It’s unfortunate, but when (the aluminum price) is 80 cents (per pound) these things are going to happen."

Aluminum producers might have missed a window to secure lower power prices as natural gas prices have recovered over the past year, Tumazos said. "The recovery to natural gas to $4.40 (per million British thermal unit) reduces the likelihood of deep concessionary power contracts and raises the possibility of a minor, mild recovery in coal prices. The window for getting deep concessionary power contracts was $1.90 (mmBtu) gas—13 months ago. ... So the cheap power window is now gone, and the aluminum price is lousy."

The aluminum industry also is coping with overcapacity issues, said Charles Bradford, president of Bradford Research Inc., New York. "There has been excess capacity in aluminum, in steel and almost every place you look," he said. "Capacity comes on. Demand is weak. It’s economics 101."

Alcoa’s announcement is consistent with past comments the company has made about looking to "move down the cost curve," said Bank of America Merrill Lynch senior research analyst Timna Tanners. It also could represent "posturing like what we saw from Century (Aluminum Co.) in a bid to get lower power prices to improve their competitiveness."

Monterey, Calif.-based Century recently reached a tentative power agreement for its smelter in Hawesville, Ky. (amm.com, April 29). The company had warned it would close Hawesville if it could not secure a competitive power deal (amm.com, April 17).

"Certainly, it is not a bad thing for the aluminum industry to see some of the higher-cost capacity come out of the market," she said.

Like other companies in the commodities sector, Alcoa has only limited control over pricing, so it must focus on the things it can control—namely, costs, Bradford said. "That’s a constant battle. It will be interesting to see what happens. The crash in metals prices is really serious stuff. ... It’s not aluminum per se, it’s not copper per se, it’s something affecting all of them."


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