Rio Tinto acknowledged a gloomy outlook for the sector
this week, when it slashed the book value of its Alcan unit by $9 billion.
Rio Chief Executive Tom Albanese warned margins may
continue to be squeezed in the medium term. "The current environment in
the aluminum industry is tough ... I can't predict when the price will
recover."
In China, which accounts for 40 percent of global output,
local authorities are wary of closing smelters that lose money
but provide jobs, while the central government continues
to drive an overall capacity expansion to maintain
self-sufficiency.
Election politics in Russia also have halted at least one planned
shutdown.
Throughout the sector, furthermore, smelters that consider
closures are often hampered by long-term contracts to buy power and raw
materials.
Companies are losing money on 30 to 40 percent of global
output, analysts estimate. Margins have been hammered by five
years of surpluses and rising input costs, particularly
for power.
Benchmark aluminum prices on the London Metal Exchange
have crumbled by a third since hitting a peak in July
2008 of $3,380 per ton.
Producers including Rio, Alcoa and Norsk Hydro have cut
global capacity by around 1.3 million tons as prices slumped in the second half
of 2011 to reach below $2,000 per ton, but more cuts are needed to bring the
market
into balance.
Analysts in a Reuters poll last month expected further
market surpluses of 600,000 tons this year and 415,000 tons
in 2013.
Earlier in the week, the head of rival BHP Billtion was
even more downbeat, saying the world's largest mining group had halted
investment in aluminum and had to review the future of its business.
"There is no sense in letting something hang ... on
the balance sheet if it doesn't want to be there," CEO Marius
Kloppers said.
"It's something that we've got to review. It's
clearly not something that's an issue now, but I do think I have to note the
aluminum reductions (in profitability) are structural. It's not a cyclical
thing."
CHINESE PRESSURE
The elephant in the room is China with its many ageing
and high-cost operations. "In
China, there is some political pressure at a local level to continue some
high-cost plants running, especially if they are in a small city where they are
the largest employer," said Paul Adkins, managing director of
Beijing-based aluminum consultancy AZ China.
Chinese aluminum prices are not low enough to cause
widespread shutdowns and authorities are keen to remain self-sufficient in the
metal, he added.
Albanese said Rio had been taken by surprise by an
increase in smelting capacity in western China, where stranded coal is being
used to generate cheaper electricity for smelters.
China's annual production capacity of primary aluminum
may jump 60 percent in the next four years, an official at a
state-backed industry association said last November.
"In our opinion, the Chinese government has been
unsuccessful in controlling aluminum capacity growth,"
Macquarie said in a note earlier this month.
Macquarie estimated that nearly 80 percent of Chinese
producers were not profitable, based on total cost of production
including administration, finance and depreciation.
The cost of shutting down capacity is high, however, so
most smelters will strive to maintain existing output, it added.
RUSSIAN POLITICS
In Russia, home to top global aluminum producer UC RUSAL,
political considerations have also come into play.
Prime Minister Vladimir Putin, seeking to return to the
presidency next month, intervened in December to prevent an
archaic 67-year-old smelter from closing.
"There is sensitivity, especially in an election
year that we're in now," said analyst Erik Danemar at Deutsche Bank in
Moscow.
"There are limits to how quickly RUSAL can move and
also how much they can move. But over time the government is also
reasonable over what needs to be done."
RUSAL, which accounts for about 10 percent of global
production, said last month it might cut output by 6 percent
over the next 18 months.
Its European operations could take the brunt of any cuts
since they are less profitable than the Siberian smelters, which have access to
cheap hydroelectric power.
"The European operations are probably breaking even,
maybe making a little money if they get a good premium," Danemar
added.
