Aluminium’s Fall from Grace

on Oct 9, 2012
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Although aluminium is the second most used metal in the world after steel and can be found in everything from beer cans to aircraft, the aluminium industry has been facing various difficulties, with major producers suffering from significant profit losses. On 7 October 2012, the Financial Times published an article on the hardships facing the aluminium industry and particularly about the challenges for the world’s largest aluminium producer, the Moscow-based UC Rusal.

Despite its numerous applications, aluminium is currently the worst performing mined commodity tracked by the International Monetary Fund (IMF). Yet, this has not always been the case, as the light metal was emblematic of the mid-20th century industrial boom. Between 1950 and 2011, the aluminium market increased from 1.5 million to 44 million tonnes. And while demand for the metal is still rising, the same does not hold true for the price of aluminium which at $2,100 (£1,309) a tonne is little changed since 1980.

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!m[World’s Top Producers Suffer From Downturn In Profitability As Chinese Smelters Gain Momentum ](/uploads/story/547/thumbs/pic1_inline.png)The fact that growth in demand is not reflected by growth in profit is most visible in the state of the world’s leading aluminium producers, with the FT reporting that Rusal, Alcoa (NYSE:AA), Rio Tinto (LON:RIO), the Chinese state-owned mining group Chalco, and the Norwegian producer Norsk Hydro (STO:NHYO) have collectively collapsed from a value of $200 billion (£124.7 billion) to $65 billion (£40.5 billion) in just five years. Bloomberg reported on October 9 that the 1888-founded Alcoa has slumped about 50 percent in the last 18 months as aluminium prices dropped to an almost three-year low. “I would not put my pension into the aluminium industry,” notes Macquarie’s Duncan Hobbs, as quoted by the FT.

Among the reasons for the aluminium market downtrend is the fact that the boom in demand which in theory should boost prices is offset by boom in supply. Production costs are another major industry challenge. Aluminium production has always been extremely energy intensive; for instance in 2010, the aluminium industry’s total power usage in Iceland, which hosts three smelters, accounted for as much as 73 percent of the country’s total power consumption, according to data by the National Energy Authority of Iceland.

In addition to rising costs, rising production and rising inventories, there is one more factor significantly contributing to the downfall of major aluminium producers, namely the marked growth of Chinese production. While demand from China has helped boost the copper and the iron ore markets, the rise in aluminium output in the country has made China largely self-sufficient in aluminium.

The FT reports that while in 2000 China was a relatively minor producer of 2.8 million tonnes, in 2011, it accounted for 40 percent of the world’s total aluminium output with 17.8 million tonnes. “If most of the industry is trying to maximise profits, China is still in mode of trying to maximise development,” notes Dick Evans, Alcan’s chief executive, as quoted by the FT. “Aluminium fits into that plan because it’s something they can control – they don’t control copper and they don’t control iron ore.”
Producers outside China are trying to come to terms with the new aluminium realities, with Rio Tinto looking to expand in the bauxite market and Alcoa relying also on profit from its other divisions. Rusal on the other hand focuses mostly on its plants in Eastern Russia which have access to cheap hydroelectric power and considers closing smelters in other parts of the country.
The FT quotes Deutsche Bank’s metals analyst Daniel Brebner as saying that while there might be a brighter future for aluminium some day, “at this point in time it’s a long way away.”

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