 "Inventories, surplus output pile pressure on aluminium prices")
Tepid demand from principal consumption points like automobile, packaging and construction, yet to recover from the mauling of the world recession, has left the aluminium industry in deepest crisis. Industry giants from the US to Europe to China are sufficiently bedraggled by aluminium prices staying much below $2,000 a tonne. More, ingot physical premiums - the price buyers pay on top of the London Metal Exchange (LME) rate - are now compensating producers less than in the first half of 2013. This is in spite of premiums climbing to record highs of $250 a tonne from below $150 a tonne prior to 2008.
High premiums have got much to do with aluminium stockpiles held at LME, mostly as part of financing deals. Interest rates in developed economies continuing to be low, operators have been quick to spot an opportunity to make profits by rolling over stocks and selling forward. Warehouse rents for storing aluminium are also low.
LME stocks close to 5.4 million tonnes (mt) and much of that constituting financial deals are a pointer to the global aluminium industry falling short of required production discipline. Consequently, the market has remained in structural surplus. The three-month LME price is at a multi-year low of $1,799 a tonne. Consequently, about 60 per cent of world aluminium smelting capacity is not recovering cash costs. What will be sending shivers down the spine of the industry is absence of a chance for the market to move back into balance in the near term.
No wonder aluminium leaders from UC Rusal to Aluminium Corporation of China (popularly known as Chalco) lost money in the first half of 2013. Alcoa, seen as the bellwether of the US manufacturing sector, managed to stay in the black due to productivity gains and sterling performance of engineered products like aerospace fasteners and turbine blades. World economic stress apart, large capacity overhang despite resting of some smelters and postponement of commissioning of new almost-ready capacity by a few groups has kept aluminium prices distressingly low. Billionaire Rusal CEO Oleg Deripaska has hit the bull's eye by saying "our industry remains in a crisis of its own making, with oversupply leading to excess of stock overhanging the market." He says sustainability will demand of its constituents to "take a uniformly disciplined approach towards inefficient and unprofitable production." Deripaska says Rusal will stay in the forefront of the campaign to improve the "business efficiency" of an industry awash with surplus capacity.
Setting a new standard of transparency, Rusal has let the industry know it could effect savings of three per cent in the aluminium segment cost to $1,911 a tonne in the June 2013 quarter from $1,971 a tonne in this year's first three months, by tinkering with cost across smelter operation. In a cowboyish vein, an Alcoa official says the metal maker goes on reaffirming its ability to shave costs. "This is a company that remains profitable and strong, despite the tough environment," he says. Whatever the level of efficiency of a smelter, margins remain under intense pressure in the face of aluminium prices remaining stubbornly low, while energy costs outside the US have soared.
Are we seeing industry leaders living up to their pronouncements by actions on ground? In an attempt to support prices, Rusal is to cut production this year by 357,000 tonnes, around 8.5 per cent against the seven per cent planned earlier. Equally importantly, the Russian aluminium giant is to postpone commissioning of its 588,000-tonne smelter at Boguchansk in Siberia from later this year to a more appropriate point in 2014. In the industry's global campaign to balance supply and demand, Alcoa in phases will be idling 16 per cent or 646,800 tonnes of smelting capacity, including permanent closure of some high-cost potline in the US, Canada and Italy. Mauled by oversupply, Chalco temporarily laid off 380,000-tonne capacity, representing nine per cent of its output in 2012, in June. China, which last year had a share of 22 mt of the world production of 47.72 mt, will have to do a lot more in disciplining production to restore some balance in a worryingly surplus market. Reports of new capacity ramping up in China, along with some producers restarting smelters closed earlier, are causing market jitters.
The median of various projections points to aluminium production rising about five per cent and consumption by six per cent in the current year. That would still leave the world with aluminium surplus of 750,000 tonnes at 2013-end, to rise to 1.75 mt next year, according to Deutsche Bank. Besides, LME stocks will continue to spread gloom in the market. No wonder, BNP Paribas is seeing the aluminium cash price averaging $1,910 a tonne this year and $2,000 a tonne in 2014. Being in the lowest cost quartile, Indian aluminium makers will be just able to break even at these rates.
High premiums have got much to do with aluminium stockpiles held at LME, mostly as part of financing deals. Interest rates in developed economies continuing to be low, operators have been quick to spot an opportunity to make profits by rolling over stocks and selling forward. Warehouse rents for storing aluminium are also low.
LME stocks close to 5.4 million tonnes (mt) and much of that constituting financial deals are a pointer to the global aluminium industry falling short of required production discipline. Consequently, the market has remained in structural surplus. The three-month LME price is at a multi-year low of $1,799 a tonne. Consequently, about 60 per cent of world aluminium smelting capacity is not recovering cash costs. What will be sending shivers down the spine of the industry is absence of a chance for the market to move back into balance in the near term.
No wonder aluminium leaders from UC Rusal to Aluminium Corporation of China (popularly known as Chalco) lost money in the first half of 2013. Alcoa, seen as the bellwether of the US manufacturing sector, managed to stay in the black due to productivity gains and sterling performance of engineered products like aerospace fasteners and turbine blades. World economic stress apart, large capacity overhang despite resting of some smelters and postponement of commissioning of new almost-ready capacity by a few groups has kept aluminium prices distressingly low. Billionaire Rusal CEO Oleg Deripaska has hit the bull's eye by saying "our industry remains in a crisis of its own making, with oversupply leading to excess of stock overhanging the market." He says sustainability will demand of its constituents to "take a uniformly disciplined approach towards inefficient and unprofitable production." Deripaska says Rusal will stay in the forefront of the campaign to improve the "business efficiency" of an industry awash with surplus capacity.
Setting a new standard of transparency, Rusal has let the industry know it could effect savings of three per cent in the aluminium segment cost to $1,911 a tonne in the June 2013 quarter from $1,971 a tonne in this year's first three months, by tinkering with cost across smelter operation. In a cowboyish vein, an Alcoa official says the metal maker goes on reaffirming its ability to shave costs. "This is a company that remains profitable and strong, despite the tough environment," he says. Whatever the level of efficiency of a smelter, margins remain under intense pressure in the face of aluminium prices remaining stubbornly low, while energy costs outside the US have soared.
Are we seeing industry leaders living up to their pronouncements by actions on ground? In an attempt to support prices, Rusal is to cut production this year by 357,000 tonnes, around 8.5 per cent against the seven per cent planned earlier. Equally importantly, the Russian aluminium giant is to postpone commissioning of its 588,000-tonne smelter at Boguchansk in Siberia from later this year to a more appropriate point in 2014. In the industry's global campaign to balance supply and demand, Alcoa in phases will be idling 16 per cent or 646,800 tonnes of smelting capacity, including permanent closure of some high-cost potline in the US, Canada and Italy. Mauled by oversupply, Chalco temporarily laid off 380,000-tonne capacity, representing nine per cent of its output in 2012, in June. China, which last year had a share of 22 mt of the world production of 47.72 mt, will have to do a lot more in disciplining production to restore some balance in a worryingly surplus market. Reports of new capacity ramping up in China, along with some producers restarting smelters closed earlier, are causing market jitters.
The median of various projections points to aluminium production rising about five per cent and consumption by six per cent in the current year. That would still leave the world with aluminium surplus of 750,000 tonnes at 2013-end, to rise to 1.75 mt next year, according to Deutsche Bank. Besides, LME stocks will continue to spread gloom in the market. No wonder, BNP Paribas is seeing the aluminium cash price averaging $1,910 a tonne this year and $2,000 a tonne in 2014. Being in the lowest cost quartile, Indian aluminium makers will be just able to break even at these rates.