Aluminum: Another year of living on the edge?

Updated 27 January 2013
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Aluminum: Another year of living on the edge?

LONDON: It wasn’t aluminum that finally did for Tom Albanese, who was forced to step down as chief executive of mining giant Rio Tinto earlier this month.
The trigger was the $ 3 billion write-down of the company’s Mozambique coal ambitions just two years after it had splashed out $ 4.2 billion on the Riversdale assets.
But both chief executive and company had long been living under the long shadow of the $38-billion acquisition of the Alcan aluminum assets back in 2007.
Another $ 10-11 billion of write-downs against those assets brings the cumulative total to over $ 29 billion, marking it out as one of the most disastrous deals ever in the mining and metals sector.
And that’s saying something, given the industry’s long history of disastrous deals.
Rio Tinto blamed the latest impairment charges on “the further deterioration in aluminum market conditions in 2012,” citing in particular “strong currencies in certain regions and high energy and raw material costs.”
It’s somehow fitting that the aluminum sword has fallen on Albanese just as the global industry is once again churning out record amounts of metal.
The latest figures from the International Aluminum Institute (IAI) show that global annualized production in December hit an all-time record of 45.55 million tons, up over 600,000 tons on the previous month’s collective run-rate.
It’s a problematic outcome for an industry experiencing a “further deterioration” in market conditions but this is the root conundrum facing producers of the light metal everywhere.
Things looked very different a year ago with industry leaders such as Alcoa announcing capacity closures and curtailments and smaller players throwing in the towel because of low prices.
Alcoa announced the permanent closure of 291,000 tons of capacity, albeit capacity that was already under mothballs. It and other Western producers also announced production cuts totaling around 1.2 million tons of annual capacity.
They duly delivered.
Between November 2011, when producers started to react to falling prices, and December 2012 annualized production in the world outside of China fell by 1.1 million tons to 24.8 million tons.
The next graphic, comparing annualized production in December with that a year earlier shows which regions took the biggest hits.
Output in the IAI’s “Oceania” category, comprising Australia and New Zealand, slumped by 11 percent, largely reflecting the mothballing of Norsk Hydro’s 180,000-ton per year Kurri Kurri smelter in New South Wales.
Rio has four smelters in the region, three in Australia and one in New Zealand. All have been shuffled into its recently-created “Pacific Aluminum” division, which carries a large “for sale” sign round its neck.
Western Europe took the brunt of the other capacity closures, unsurprisingly given the number of older, smaller smelters still operating in the region. Annualized output fell by 10 percent over the course of last year.
Most other regions saw marginal production declines with two exceptions, non-China Asia and the Gulf, both of which have attracted investment in newer, lower-cost capacity.
And what of China, both the world’s largest producer and consumer of aluminum?
On paper, it should have slashed production rates last year, given the positioning of many of its smelters at the top end of the cost curve.
In reality, cost-curve economics count for nothing if governments are prepared to subsidize loss-making plants.
This is what happened both at local level, in the form of power subsidies, and at national level, in the form of “strategic” purchases by the State Reserves Bureau toward the end of the year.
Chinese production rose by 11 percent last year to 19.8 million tons, according to figures supplied to the IAI by the China Nonferrous Metals Industry Association.
Worth noting was the sharp acceleration in production over the last three months of 2012. By December national annualized output was running at 20.7 million tons, an all-time record and 17 percent higher than December 2011.
An element of end-of-year quota-filling may be at work here but the underlying driver of higher output is the build-out of capacity in China’s north-western provinces, where operators have been attracted by stranded coal deposits.
Western experts may shake their heads about the industrial logic of locating production capacity so far away from consumers on the eastern seaboard, but in China it doesn’t matter.
China views its aluminum smelter sector as strategic and commodity economics will be bent to keep it churning out as much metal as is needed.
This translates into higher production again this year, new lower-cost capacity largely supplementing rather than replacing older, higher-cost capacity.
And crucially for the rest of the world, it means that China will remain a major importer of raw materials such as alumina and bauxite but not of all that surplus metal that is hanging over the market.
And production outside of China is going to rise too over the coming year, largely on the back of new capacity ramping up in the Gulf region and in Russia.
Older capacity will just keep on hanging in there, largely thanks to the shifting price structure of the aluminum market.
Physical premiums are the life-saver for many operators. As the base London Metal Exchange (LME) price has fallen, premiums have risen, a phenomenon captured in the next graphic, showing European aluminum prices.
Right now the LME base price is trading just shy of $ 2,100 per ton, a level that, on paper at least, would spell more forced curtailments.
Throw in the near $ 300 per ton premium currently trading for duty-paid metal, however, and the price is sufficient for even the most marginal to eke out a meagre existence.
These historically high premiums result from the “cash-and-carry” trade, a low-return but low-risk trade that is attractive only in our through-the-mirror financial world of ultra-low interest rates and negative real returns.
It means huge amounts of surplus metal being sucked up by investment houses, both in LME warehouse and, more problematically for the LME’s struggling warehouse system, in cheaper off-market rental deals.
You can bet that when the Rio board sat down to look at the economics of buying Alcan back in 2007, producing metal to be shunted into sheds to gather dust for metals financing deals was not on the agenda.
But this is where we are six years later.
And no-one is expecting much to change this year, other than for premiums to rise further still, as the tug or war for metal between manufacturers and investors heats up against a backdrop of manufacturing recovery.
Good news for marginal smelters it may be. But it also means that every producer, barring those bringing on new capacity in low-cost energy regions such as the Gulf, will be condemned to another year of living life on the margin, and a thin one at that.
— Andy Home is a Reuters columnist. The opinions expressed are his own.


World Cup football fakes keep Dubai’s ‘Dolce & Karama’ traders busy

Updated 12 min 57 sec ago
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World Cup football fakes keep Dubai’s ‘Dolce & Karama’ traders busy

  • Dubai's “Dolce and Karama” is the emirate's copycat capital
  • Neymar Jr shirts are proving especially popular with local shoppers

DUBAI: Tucked away in an old residential district and far from Dubai’s glitzy air-conditioned malls, the Karama area of the city is doing a roaring trade in selling World Cup football shirts.

But if you’re looking for the genuine article, you may have come to the wrong place.

Karama is Dubai's copycat capital where the knockoff imitations of the world's most famous fashion brands are sold for a fraction of the genuine price.

Known to some locals jokingly by the epithet “Dolce and Karama,” a play on the Dolce & Gabbana Italian fashion house, this is a place where if you have to ask the price, you probably can afford it.

With three weeks to go until football’s new world champions are crowned, the world’s biggest sporting tournament is keeping the tills chiming on the street that has become notorious for selling everything from fake Luis Vuitton bags to knockoff Ray-Ban sunglasses.

However since the tournament kicked off just over a week ago, it’s been football not fashion, that has put a smile on the face of traders.

Retailing for a fraction of their high-street cost, the copycat shirts — especially those bearing the name of Brazilian superstar Neymar — are flying off the stalls less than week into the tournament, as UAE-based fans who want to don the colors of their favorite team or player, look for bargains.

Mohammad Ashraf has been trading in Dubai’s Karama Shopping Complex for 15 years.

At his store, Mina Fashion, Ashraf said the World Cup has brought a booming trade.

When asked how many shirts he would sell prior to the Fifa World Cup, he shrugged.

“Maybe one, two — maximum five a day,” he said.

But the Indian trader has quadrupled his business since last week’s kick-off.

“Now, we have been very busy,” he said. “We sell at least 20 pieces a day — maybe more,” he said.

His football shirts are a fraction of the cost of the genuine article on sale in Dubai malls where retailers are feeling the pressure from the growth of online rivals, the introduction of VAT and the strong dollar to which the UAE dirham is pegged — that is hitting tourist spending hard.

Karama football shirts sell for about 65 dirhams ($18) in adult size and 55 dirhams for children. But the real deal costs three or four times as much a few miles down the road in the Dubai Mall, the city’s biggest tourist draw.

In Karama, the football shirts of the Brazil, Argentina and Germany teams have been among the biggest sellers.

And the most popular player?

Ashraf said shirts bearing the name of Brazilian footballer Neymar da Sila Santos Junior have been flying off the shelves.

Abdulla Javid, runs Nujoom Al Maleb in the Karama shopping district — a shop selling a variety of knock-off sportswear — including World Cup shirts for men, youths and children.

“They are not real, not branded — branded ones are very expensive,” he said.

“We have shirts for Germany, for Argentina, for Portugal, for Sweden, for Brazil and for Belgium,” he said, pointing to racks of multi-colored football shirts.

Mens shirts retail for about 45 dirhams for adult sizes in his shop and 40 dirhams for youths. For young children, he sells shirts and shorts for a combined price of 30 dirhams.

The World Cup has also been a welcome boom for business.

“Before we sell maybe between five to 10 (shirts) a day,” he said. “Now, at least 20 to 30 pieces a day. It has been very busy. This time is a good time for us.”

Also at Karama Shopping Complex is Zico Sports.

Ahmed Jaber, a 53-year-old trader, said there are good deals to be found in at the shop he has worked in since the 1980s.

He sells football shirts that are both “branded” and “non-branded” — in other words the genuine article and cheaper knock-offs.

He said customers have been happy to shell out for the genuine football shirts for the adult sizes — which he sells for 379 dirhams, but for children, shoppers prefer to buy the fake football shirts, which he sells for about 30 dirhams.

The most popular shirts since the start of World Cup have been for Brazil, Argentina and France, he said, but his shops have an abundance of kit for all competing countries.

When he asked how the 2018 World Cup had been for business, he laughed.

“Not bad at all!,” he said.