LONDON: A new year it may be but there will be no new dawn for the beleaguered aluminum smelter sector, just another year of fighting to survive.
Setting an appropriately downbeat tone for 2014 was Dutch producer Aldel’s filing for bankruptcy on Dec. 30.
US producer Alcoa, meanwhile, kicked off the financial reporting season with a massive $1.7 billion write-down of smelter assets. It has already closed and mothballed significant amounts of capacity and has more under review.
As the cumulative pain continues and the capacity curtailments mount, there is a growing belief that the aluminum market, outside China at least, will record a supply-demand deficit this year.
The problem is that it will probably be far too small to make any appreciable dent in the huge stocks that have accumulated over many years of consecutive surplus.
Those legacy stocks hang like a dead weight around the London Metal Exchange (LME) three-month price CMAL3, currently trading just north of $1,750 per ton and in imminent danger of revisiting December’s four-year low of $1,736.25 per ton.
Producer profitability remains dependent on the physical premiums that can be achieved over and above that LME basis price.
And that's another problem, given the LME’s stated intention of cutting aluminum load-out queues and trying to engineer a reconnect between basis and “all-in” price.
Aldel, with primary aluminum capacity, of 110,000 tons per year, has been battling to stay afloat for years. The struggle is finally over, a last-ditch plan to connect the plant to the (cheaper) German power grid coming to naught.
Its closure marks the departure from the business of aluminum smelting of the private equity Klesch Group.
The Group’s Vlissingen operations, also in the Netherlands, went bankrupt in 2012 with the anode plant and cast-house subsequently sold off and the smelter itself demolished.
The third Klesch smelter, Voerde in Germany, went into bankruptcy in the same year. It is still producing with the company’s creditors committed to running it until at least the end of this year.
It’s just one of a number of zombie plants in Europe, still churning out metal with little hope of doing so at a profit any time soon.
The Mostar smelter in Bosnia limps on despite repeated threats of closure. It has just secured a short-term power deal running through the first half of this year and is surviving largely on the back of government subsidy.
So too is the KAP smelter in Montenegro, formally declared bankrupt late last year and now undergoing a state-supervised auction process.
Europe is estimated to have lost around a third of its aluminum smelter capacity during the Global Financial Crisis. That Crisis may be receding but the war of attrition in the sector shows no signs of abating.
Even global leaders such as Alcoa are visibly hurting.
The company has just announced $2.4 billion of write-downs.
The biggest single component of that hit, $1.7 billion, is a write-down of goodwill against primary aluminum assets it bought from Alumax Inc. in 1998 and Reynolds Metals Company in 2000.
“The impairment is a result of unfavorable trends that impact the estimated fair value of the Primary Metals business such as lower metal prices, reduced operating margins and increased discount rates,” it said.
Interestingly, the valuation yardstick used to determine the charge includes both LME forward curve and an assessment of likely physical premium levels. Even the “all-in” price was evidently not sufficient to avert the need to bite the bullet.
The scale of the Q4 write-downs inevitably overshadowed what Alcoa called a “solid” operating performance. And true, excluding special items, the company generated $40 million after-tax operating income (ATOI) in the quarter.
But not in its primary aluminum smelting segment, which recorded a net loss of $35 million in the period, despite the company’s ongoing policy of shifting itself down the global cost curve.
Portfolio optimization is a core part of that strategy and Alcoa has permanently closed 481,000 tons of annual capacity and mothballed another 655,000 tons.
There may be more cuts. A further 183,000 tons of capacity is under review, it said on Thursday.
The combination of forced closures such as that at Aldel and voluntary curtailments such as those at Alcoa may finally nudge the non-China market into deficit this year.
Alcoa itself projects a 294,000-ton production shortfall over the course of 2014. Not in China, though, where it forecasts a 400,000-ton surplus as the ramp-up of new capacity in the northwestern part of the country far outstrips closures of outdated capacity in the east.
Alcoa and its peers will have to hope that Chinese surplus stays in China rather than leaking out of the country in the form of semi-fabricated products.
More depressing for non-Chinese producers, however, is the size of that expected deficit in relation to the size of legacy stocks in the aluminum market. Five million tons can be clearly seen in the LME’s daily stocks report. There is another five million or so sitting off market.
A 300,000-ton deficit, and Alcoa might be forgiven for taking an optimistic view of market dynamics, is not going to make much impact. Indeed, the market could record 10 years of such deficit and still be struggling with the reminder of its undisciplined past.
The analyst consensus is that a sustained price recovery is going to need more closures, whether voluntary or involuntary. The current LME price says so too.
That leaves producers still clinging to the lifeline of the physical premium, which is once again rising just about everywhere.
In the United States the Midwest premium rocketed to 15 cents per lb ($331 per ton) in the first week of the new year.
It has not stopped there, and was last reported at 16 cents per lb.
— Andy Home is a columnist for Reuters. The opinions expressed here are those of the author.
