Much to the relief of aluminium producers, the white metal has not stayed for long below the psychologically unsettling level of $2,000 a tonne when 30 per cent of smelting capacity is found in the red zone. At no point in current weeks, however, did the scene come anywhere close to the scare that visited the industry at the height of the ruinous 2008-09 recession, when, for weeks, aluminium sold at below $1,500 a tonne, with demand plunging and inventories piling up.
This, however, is of little comfort for the industry across the globe, braced for much lower earnings in the three months to end in December than in the first three quarters of 2011. Since the third week of last month, aluminium may have recovered $150 to $2,150 a tonne, but this is way below the peak of $2,800 a tonne seen in May. Commodities in general remain in the grip of a bear market and no one knows when there is going to be a strong recovery in demand, which alone can lift prices. In this environment, stockists and actual users of aluminium are only to be expected to keep their inventories low. The same is happening with steel.
While at prevailing rates only the more efficient producers are breaking even or making some profits, the world aluminium industry, which is reliant on power to the extent of around one-third of its capacity, has to contend with rising energy cost. This is particularly true of China, accounting of two of every five units of global aluminium consumption. According to research agency Brook Hunt, energy alone has a share of 30 to 40 per cent of aluminium smelting cost. If the metal further gets hammered in the market and people have come to accept further gyrations in the context of possibilities of the euro zone plunging into recession and forecasts by the likes of Union Bank of Switzerland that commodities per se will continue to be found in a “difficult environment” in 2012, people will stay wary of holding on to aluminium shares.
No wonder, shares of Hindalco and Nalco have lost considerable ground. Similarly Aluminium Corporation of China fell close to 40 per cent in Hong Kong trading this year. Anglo-Australian Rio Tinto conceded as much as 25 per cent value in London trading in the same period, thanks mainly to its ownership of very large aluminium assets. The world’s leading aluminium producer, Alcoa, has not fared any better at the bourse. To make a guess as to when aluminium will be back to the May level or how soon Hindalco will return to its 52-week high level will be throwing a dice. Who will not agree with Rio Tinto CEO Alcan Jacynthe Cote that “each commodity has its moment in the sun and in the shadow”? It is not only aluminium but a whole lot of other metals and minerals are now under dark clouds. Jacynthe says there will be an “upside for aluminium in future,” without giving hints as to when the metal will start shining.
As for now, the aluminium division of Rio is resigned to second half earnings “well below those of the first half.” Like Hindalco in a major expansion mode, Rio is investing $3.3 billion to rebuild and expand its Kitimat smelter in Canada to 420,000-tonne capacity. The smelter, to be run on hydroelectricity is to cut its emission intensity by half. The ambition is to make Kitimat one of the world’s lowest cost smelters, so that it fits with the Rio strategy of margin improvement across its ‘struggling’ aluminium division. While Rio is trying to put life in its aluminium business by focusing on good assets as it attempts exiting high cost operations, Indian industry officials are keeping an eye on the outcome of BHP Billiton’s ongoing review of its aluminium portfolio, which is a mix of some wholly-owned assets and a string of joint ventures. They say the review may result in BHP either selling all or some of its aluminium/alumina assets. Indian business houses have a demonstrable appetite for foreign acquisitions. According to officials here, in case BHP decides to move out of aluminium, the existing partners will stand a better chance to acquire the assets.
In the face of global aluminium capacity overhang and the euro zone crisis starting to impact metal demand outside Europe, the producers are reacting in two ways – postponement of restart of smelters idled earlier and shuttering of high cost smelters. Leading European aluminium maker Hydro has said it will consider recommissioning its Sundal smelter in Norway only when the market behaves better. At the same time, speculation is there that Chinese producers have curtailed yearly production by about 1.5 million tonnes. The market must have taken a cue that the rumoured Chinese move would to some extent take care of industry overcapacity. A Morgan Stanley official says the world is seeing a reassuring “disciplined approach from producers in balancing supply and demand.” But aluminium price rebound will call for more than a disciplined supply position to a “strong recovery in demand.”