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Alcoa urges production capacity cuts

Keywords: Tags  Alcoa, Klaus Kleinfeld, William Oplinger, quarterly earnings, primary metals, LME, aluminum prices, aluminum premiums production cuts

CHICAGO — Alcoa Inc. wants other aluminum producers to follow its lead in pruning production capacity as low metal prices have left big parts of the aluminum industry "under water," according to company executives.

"We are very committed to acting (to reduce production capacity), and I wish that this would be indicative of every company that’s playing in our industry," Alcoa chairman and chief executive officer Klaus Kleinfeld said during the Pittsburgh-based aluminum producer’s second-quarter earnings conference call July 8.

Alcoa has said it is mulling cutting up to 460,000 tonnes of smelter capacity over the next year in response to swooning aluminum tags (, May 1). The company has already closed its previously idled 44,000-tonne-per-year smelter in Fusina, Italy, (, June 28) and has also announced plans to permanently close two older potlines at its Baie-Comeau smelter in Quebec and postpone the construction of a new potline by three years (, May 16).

"We would say that there is around a third (of the primary aluminum industry) ... that’s currently under water, and that’s including the higher premiums," Alcoa executive vice president and chief financial officer William F. Oplinger said.

Alcoa’s primary metals division recorded a $32-million after-tax operating loss in the second quarter of 2013 compared with an after-tax operating loss of $3 million in the year-ago quarter, according to earnings data released July 8

"Primary metals lost money in the quarter. Our view is that that’s symptomatic of the entire industry," Oplinger said, noting that it’s safe to assume that the 460,000 tonnes Alcoa has under review is "very close" to break-even or below on a cash-cost basis at current prices.

"We will continue to evaluate anything on a cash basis to determine whether we shut it down over the next few months at the current price levels," he said.

"And ... it’s also not that difficult to figure out which ones are higher cost here," Kleinfeld added.

Alcoa has high-cost capacity in Australia, southern Europe and parts of Brazil, depending on power prices, Oplinger said.

Still, when prodded by analysts, Oplinger cautioned that it isn’t easy to say exactly what percentage of Alcoa’s primary production could remain profitable, after taxes, if aluminum prices and premiums were to fall by another few cents.

AMM’s current Midwest premium is at 12 to 12.25 cents per pound. The primary aluminum cash contract on the London Metal Exchange ended the official session at $1,740 per tonne (78.9 cents per pound) July 9, down 2.9 percent from $1,792.50 per tonne (81.3 cents per pound) July 2 and off 18 percent from a 2013 high of $2,123 per tonne (96.3 cents per pound) on Feb. 15.

Oplinger said in prepared remarks during the call that regional premiums have remained at "high levels" because of strong physical demand for aluminum. He predicted that production cuts already implemented and "projections for more" would lead to a tightening of aluminum supplies, while the alumina sector could see a slight surplus as smelting curtailments outpace refining capacity cuts. Still, Oplinger said that the aluminum and alumina markets were "essentially balanced."

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