Sinking aluminium prices and a ballooning surplus of the metal have deepened the industry’s worst crisis in years, intensifying pressure on high-cost smelters to embark on another round of production cuts to revive prices from their malaise.
The 25% drop since last September has pushed benchmark London Metal Exchange prices to six-year lows, and the plunge this year in premiums, surcharges paid for physical delivery, to their lowest in 3-1/2 years are the biggest test for producers’ margins since the 2008 financial crisis.
More than 10% of smelting capacity outside of China, or 3.5 million tonnes of production, is running in the red with a combined LME and US premium of $1,800 per tonne, according to Wood Mackenzie data from second-quarter results.
Last week, three-month aluminium CMAL3 was at $1,621, with a US premium of $175 a tonne. The data illustrates the increasing pain across the sector as producers worry about growing exports from China.
To have a meaningful impact on prices, producers need to cut capacity by another 1 million to 2 million tonnes, said Ed Meir, an analyst at INTL FCStone.
Alcoa has closed or curtailed 170,000 tonnes of annual output this year as part of its review of 500,000 tonnes of smelting capacity announced in March, and United Co Rusal said in April it might idle 200,000 tonnes of capacity.
Last month, Century Aluminum, controlled by Glencore, announced plans to shutter its 244,000 tonne-per-year Hawesville, Kentucky smelter, blaming Chinese exports and weak prices. But that is a rounding error in a market of 50 million tonnes of supply.
Some of the highest-cost smelters - including two Alcoa plants in Spain, Klesch Group’s Delfjiz plant in the Netherlands and Trimet Aluminum’s Essen plant in Germany - are relatively small, together producing just 340,000 tonnes per year, the Wood Mackenzie data show.
Trimet said all its smelters were profitable and running at full capacity, and that the company could compensate for fluctuations in the LME price.
An Alcoa spokesperson said the company has “aggressive productivity improvements underway” and was seeking ways to reduce raw material and power costs. Klesch did not respond to a request for comment.
Few expect any immediate respite from China, the world’s top consumer and producer.
The country has cut some capacity in response to deteriorating market conditions, with Wood Mackenzie senior analyst Uday Patel estimating that 1.5 million tonnes of annualised production were eliminated at older, inefficient Chinese smelters between January and August.
But this is a drop in the ocean compared with the 3 million to 5 million tonnes of capacity China has added through modern smelters, he said.
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