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‘Radical’ action needed to fix aluminum market: BCG

Keywords: Tags  Boston Consulting Group, aluminum, overcapacity, alumina, bauxite, upstream markets, downstream markets, Michael Cowden

CHICAGO — Aluminum companies need to take "radical steps" to survive a market plagued by overcapacity, low prices and intense competition, according to a recent report by Boston Consulting Group (BCG).

"As margins dwindle, the aluminum industry sits on a very expensive asset base that needs higher profits to generate sufficient returns," BCG said in the June 24 report.

Aluminum "entirely missed the ‘commodity super cycle’ " with prices for the light metal, adjusted for inflation, below levels seen in 2000, BCG said. Steel prices, in comparison, gained more than 100 percent and copper prices as much as 350 percent, the group said.

Aluminum demand is strong from specific countries and sectors, but consumption is expected to remain "sluggish" in developed markets while significant primary aluminum capacity comes online in the Middle East and China, BCG said. Excluding China, some 6 million to 7 million tonnes of smelting capacity are expected to be added to the market by 2017, the group said.

To combat overcapacity, the aluminum industry should use mergers and acquisitions to form an industry leader with the clout to slash capacity and to push for high-cost Chinese capacity to come offline at a faster pace, BCG said.

In addition, the aluminum industry shouldn’t seek government energy subsidies to keep "high-cost plants marginally profitable," as such schemes "aggravate capacity problems," the group said.

Until smelting capacity is reduced, aluminum companies might do better to focus either upstream or downstream instead, BCG said.

On the upstream side, bauxite and alumina supplies are tighter than those of primary aluminum, with raw material prices "increasingly decoupled" from those for aluminum on the London Metal Exchange, BCG said. Smelter operators, therefore, should keep "an eye toward pursuing backward integration," including finding promising new mining locations, it said.

On the downstream front, aluminum companies face a globalized market where "business will no longer be operated on a local or regional basis," BCG said.

Trade restrictions, such as those the United States slapped on extrusions from China, "are not likely to stop the globalization of downstream supply," the group said, pointing to Chinese companies expanding into finished products such as garden furniture, picture frames and wheels.

To succeed downstream, aluminum companies will need the most competitive offerings on commodity items or differentiated products, services and brands that will command premiums from consumers, BCG said. Aluminum companies must also do a better job of understanding customer needs to establish such premium brands.

At the same time, aluminum companies, particularly those in mature markets, also need to dramatically cut back on capital expenditures, particularly on large projects that are costly during their development phase, the group added.

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