For its size and multi-country production facilities, frequent technology updates and a balance sheet making it a “confident company in a nervous world,” Alcoa of the US is seen as bellwether of the world aluminium industry. Therefore, when Alcoa reported a loss in the final quarter of 2011, the first since 2009 second quarter, due to wilting demand from packaging to construction to automobile sectors, our expectation of working of local aluminium makers during October-December period gets adequately moderated. The industry had to contend with a 12 per cent drop in aluminium prices in the December quarter and 27 per cent fall from the peak in April 2011.
B L Bagra, chairman of the National Aluminium Company (Nalco), says, “Smelting cost rises particularly on energy account are proving hurtful, but luckily demand for the white metal here is seeing steady demand growth of 9-10 per cent. The power sector will continue to generate strong demand for aluminium and we expect better buying soon from the construction and transport sectors.” The country is targeting additional power capacity creation of 100,000 Mw both in the 12th and 13th Plan. Renewal and building of transmission lines for power evacuation will call for large use of aluminium. Whatever that may be, local aluminium prices are settled by rates at the London Metal Exchange (LME).
Unlike in India where inventories of primary aluminium at the producer end have remained low, stocks with LME warehouses are now close to 5 million tonnes (mt). Europe, besieged by sovereign debt problems, is playing spoilsport for the aluminium market. Alcoa and leading research house CRU are ruling out any demand growth there for aluminium in 2012.
Debates are on as to whether Europe will be in the grip of a recession. But European traders are encountering higher financing costs. Banks, badly mauled during 2008-09 crisis and not inclined to take risks like in the past, are asking for adequate margins and also charging higher rates of interest. So, at every point in Europe – the trade, stockists and actual users – the attempt is to do with minimum inventory of aluminium. Combinations of near-term backwardation and higher financing costs are causing inflows of off warrant aluminium holdings into LME warehouses.
The answer to setbacks in aluminium prices in last year’s final quarter will be largely found in a report of Bloomberg Industries that in the earlier three quarters smelter production outpaced demand by 953,516 tonnes causing inventories to rise. As correctly anticipated by Nalco commercial director Ansuman Das, the three-month forward price has now made some fast recovery from a December end-January beginning low. “At that level of $2,000 a tonne, close to half the global aluminium capacity was found in the red zone. Some demand improvement will boost prices. That, I think, is happening outside Europe. The market has to recognise at some point that because of incremental production cost, aluminium has to have a higher floor,” says Das. So, the three month price now is over $2,160 a tonne.
According to Alcoa CEO Klaus Kleinfeld, despite European economic gloom, world demand will grow seven per cent this year against 10 per cent in 2011. But if China, where demand is set to rise 12 per cent, down from 15 per cent last year, is excluded, then aluminium use by the rest of the world will see growth of only four per cent. This besides, his forecast that the world will have an aluminium deficit of 600,000 tonnes in 2012 – this could be even more if China decides to go long in scrapping high cost smelters – should warm the cockles of the industry’s heart. The global deficit is based on the assumption that 1.1 mt of China’s 5.7 mt of unprofitable capacity will be taken offline. Industry officials will not rule out the possibility of another 1.2 mt of Chinese inefficient capacity being guillotined in case aluminium prices don’t rise fast enough. Doing away with such capacity will be to China’s advantage, since the industry there is import-dependent for raw materials, particularly alumina, has to put up with a rising energy bill and is frowned upon for environment fouling. Das says if China turns ruthless in getting rid of much of its unprofitable smelting capacity, that would give a leg-up to aluminium prices.
Rising energy and other input costs are to cause considerable churning in the world aluminium industry. Alcoa is to decommission 531,000 tonnes of smelting capacity, amounting to 12 per cent of its total. Rio Tinto is waiting for an “opportune moment” for divestment of 13 aluminium assets. Parallel to Chinese moves to shed unprofitable capacity, Shandong has announced plans to build an 800,000-tonne smelter, so also Chalco a 400,000-tonne smelter. Emirates Aluminium is to raise the Al Taweelah smelter to 1.3 mt by 2014 to make it the world’s largest single site smelter. Here Hindalco will have 1.7 mt capacity and Vedanta, including Balco, 2.5 mt capacity. Expect Nalco to build two new smelters of 500,000 tonnes capacity each. “You will see new power efficient smelters replacing inefficient capacity across the globe. After all, global aluminium demand is likely to double by 2020,” says Bagra.
