E&MJ looks at an industry facing major structural issues

By Simon Walker, European Editor

While copper is traditionally regarded as the bellwether for general economic conditions, aluminum is increasingly taking on a comparable role. From a production perspective, despite the difference in world output—40.8 million mt of aluminum against 15.9 million mt of copper in 2010, according to the U.S. Geo-

logical Survey (USGS)—there is also a remarkable level of similarity in terms of the proportions produced by the top six and top 10 companies in both cases. For both metals, the top six producers accounted for 41% of the world total that year, while at the top-10 company level, the proportion was 54% for copper against 51% for aluminum.

Perhaps the more telling difference, however, is the utilization factor for installed capacity. According to International Copper Study Group figures, in 2010 the world’s mines produced 16.1 million mt of copper against installed capacity of 19.9 million mt, representing around 80% capacity utilization. For aluminum, the USGS estimated production of 40.8 million mt compared with 53.5 million mt of capacity, or 76% utilization, a figure unlikely to make pleasant reading to corporate CFOs.

Indeed, with LME prices having drifted steadily for most of 2011 while warehouse stocks remain stubbornly high, on the face of it there can be little incentive for producers to invest in new capacity, given the high costs involved in establishing not only the smelter but also the power supply needed to run it.

Having painted this fairly gloomy picture to start with, in point of fact the aluminum industry is going through a number of significant changes, not least of which is the emergence of new, lower-cost smelting capacity in parts of the world that hitherto have played no part in aluminum production.

The Big Players
Looking first at the world scene from a national point of view, as shown in Table 1, China leads the field in terms of annual aluminum production by a substantial margin.

The top 10 countries, as listed in Table 1, accounted for around 33% of world production in 2010. As with other commodities, there has been striking growth in China’s production over the past decade, rising from about 3 million mt in 2000 (less than both the U.S. and Russia) to 16.2 million mt in 2010. What is also clear from these figures is the impact the world economic recession had on demand in 2009, even in China, and the rebound that has taken place since then. For 2011, the International Aluminium Institute reported world production of 44.3 million mt, compared with a figure of 41.2 million mt for 2010, which compares favorably with the statistics compiled by the BGS.

The main difference in terms of the geographical distribution of aluminum production over the 10-year period has been the emergence of energy-rich countries such as Iceland, the United Arab Emirates, Bahrain, Oman and Mozambique as aluminum producers, all of which have consolidated their positions as major suppliers to the world market. Conversely, some other African countries, together with the U.S., have struggled to maintain their capability to supply into growing demand, with the general trend being one of new, lower-cost capacity replacing older smelters that can no longer compete on world-wide terms.

Smelter capacity is just one aspect of aluminum production, of course, with smelters wholly dependent on the supply of bauxite and alumina, often from different parts of the world. Tables 2 and 3 provide a breakdown of the major national suppliers of both commodities, with Australia leading the pack convincingly in terms of bauxite production, and China topping the alumina-production league, based on both domestically produced and imported bauxite. Figure 1 shows the production trends for bauxite, alumina and primary aluminum between 2000 and 2010.

What Tables 2 and 3 also show is a degree of disconnect between bauxite mining and alumina production, with countries such as the U.S and Ireland relying completely on imported bauxite for refining, while Indonesia and Guinea, for example, are predominantly bauxite exporters with only limited capability for adding value before export.

When it comes to the leading aluminum-producing companies, Table 4 shows how relatively few big players have a tight hold on a large proportion of world output. The figures relate to 2010 production, since when Norway’s Hydro will have increased its capability—although not its ranking—following its acquisition of Vale’s primary aluminum interests last year.

The principal companies missing from this list include Anglo American, which has traditionally focused on other commodities, and Xstrata, which divested the aluminum assets it acquired when it bought Falconbridge. However, should the proposed merger take place between Xstrata and Glencore, the new company will once again have aluminum smelting interests. It will be educational to see whether these are retained to form the basis of a new division within the company, which would infer further acquisitions to make it competitively viable, or whether ‘Glenstrata’ chooses to divest again and leave the field to other companies.

Also missing from the top 10, India’s Vedanta Resources has been investing heavily in new capacity, and is likely to build on the 641,000 metric tons (mt) of primary aluminum that it produced in the year to March 2011. Indeed, on the basis of the company’s first nine months’ output in its 2011/12 financial year, it is likely to be around 5% up, with projects in the pipeline to increase its capacity to some 2.5 million mt/y.

Another factor to consider in the supply and demand equation is recycling, with aluminum one of the most widely recycled metals. According to the Norwegian producer, Hydro, around 10.6 million mt of aluminum were recycled during 2010, taking total supply to more than 52 million mt.

A Look at the Markets
Figure 2 illustrates LME price trends for three-months aluminum metal over the period from January 2011 to February 2012. At first glance, the chart appears relatively stable, but the reality is somewhat different. During this period, the price reached a peak of $2,772/mt in late April 2011 and a trough of $1,974/mt in mid-December—representing a drop of nearly 29% over eight months. Little wonder, then, that by the end of the year a number of companies had announced cutbacks in output, although the price had begun to gain a little as the market entered the new year.

Turning to LME stocks, Figures 3 and 4 show how these have developed over the past year, and over the past five years respectively. Looking at the one-year trend first, the most noticeable feature was the sudden influx of stock that occurred during December, when more than 40,000 mt of metal was added to the LME warehouse inventory. This took the total to more than 5 million mt, a level that represents around one-tenth of annual supply. It has to be remembered as well that the LME is by no means the only holder of aluminum in stock: producers, consumers, the Shanghai Futures Exhange and other bodies, with Hydro estimating that total stocks—declared and undeclared—may well be closer to 11 million mt.

However, it is the five-year stock graph (Figure 4) that clearly shows to how the situation developed. Up to third-quarter 2008, LME stocks—which comprise by far the largest single component of the world total—had grown gradually from around 700,000 mt to more than 1 million mt over an 18-month period. Put into perspective, that equated to around one week’s supply on the basis of supply in 2010.

The 12 months from mid-2008 to mid-2009 marked the turning point for the industry. As Figure 4 shows, LME stocks rose unchecked from around 1 million mt to 4.5 million mt as smelters continued to produce and consumers cut back on demand, and although the situation stabilized at the end of 2009, stock levels have remained hovering around the 4.5 million mt mark ever since.

Under such circumstances, it is hardly surprising that a new round of production cutbacks is now under way as companies weed out higher-cost capacity that they perceive will have little long-term viability. Speaking at the presentation of the company’s 2011 results in early February, Rio Tinto’s CEO, Tom Albanese said, “Outside of China, we estimate that approximately 2.5 million mt of smelting capacity is in a loss-making position at current prices and input costs.”

In respect of demand, it is interesting to see the wide variation in sectoral offtake between different parts of the world. Table 5 provides a breakdown of end-user sectors for both industrialized- and developing-economy countries, showing that aluminum use in construction and in the production of consumer goods is higher in the developing world, whereas transport and packaging are the dominant end-uses in mature economies.

Finally, Table 6 shows United Company Rusal’s predictions for aluminum consumption, on a 100% basis, for different regions of the world in 2010 and in 2025. While the company expects China to build an even stronger demand base than at present, the real growth area (in percentage terms at least) will be the rest of Southeast Asia, while Japan’s usage will fall significantly. Taken as an indicator of economic progress, Rusal’s projections make grim reading for Latin America, and particularly for Africa, where it expects growth in demand to be minimal in real terms and consumption to remain insignificant in relation to overall demand.

What Rusal’s figures do not show, of course, are the actual quantities involved in making these comparisons. A joint USGS/EPA study presented at an OECD meeting in 2010 estimated world aluminum demand will have grown to 120 million mt/y by 2025 (requiring the production of 570 million mt of bauxite and 230 million mt of alumina), assuming an average growth rate of 4.1%. On recent experience, this may or may not be realistic.

Rationalization, Past and Present
Before reviewing the state of the industry today, it is perhaps worth taking a look back to see how the current major players evolved. For example, Rusal was formed in 2007 through the merger of the former OAO Rusal, Sual and some of Glencore’s alumina-sector operations.

During the late 1990s, Alcoa spent more than $10 billion on buying out other aluminum producers, including Alumax, Reynolds and Cordant, while Alcan’s outlay on takeovers that included algroup and Pechiney was not much less. The $38-billion takeover of Alcan by Rio Tinto in 2007 led to raised eyebrows at the time, given that it surpassed Alcoa’s already tabled bid by around $11 billion. This has since come back to haunt Rio Tinto, which took an $8.9-billion charge against its 2011 accounts covering write-downs in its aluminum business. The company’s CFO, Guy Elliott, said, “Strong currencies in some regions, high raw material costs and rising LME inventory are delaying growth projects for new aluminum capacity and leading to much lower market values for aluminum assets than a year ago. The combination of these factors has led us to write off $8.9 billion of our aluminum assets in 2011, of which $7.4 billion was goodwill.”

Oriel Securities analyst Charles Cooper summarized the situation thus: “The group has finally admitted defeat on Alcan amid low prices and soaring input costs,” he was reported as saying at the time.

Rio Tinto’s write-down came only a few weeks after it had announced a major restructuring of its aluminum business, with a number of its plants in Australia and elsewhere being earmarked for future divestment. On the other side of the coin, the company has confirmed the $2.7 billion needed to complete the modernization and expansion at its Kitimat smelter in British Columbia. The modernization of Kitimat will transform its performance, moving it from the third quartile to the first decile of the industry cost curve, and cutting greenhouse-gas emissions by about half, according to Jacynthe Côté, Rio Tinto Alcan’s CEO.

The other major that has been aggressively acquiring aluminum-sector capacity, Hydro, took over Vale’s aluminum operations last year in a deal worth $5.3 billion, adding bauxite, alumina and primary metal tonnage to its portfolio. The transaction involved Vale taking a 22% stake in Hydro, which also commissioned its 50%-held, 585,000-mt/y Qatalum smelter in Qatar in mid-year. Meanwhile, the company’s increasing focus on lower-cost production led to it cutting back output at Kurri Kurri in Australia by a third to 120,000 mt/y. The decision, Hydro said, was in response to the weak macro-economic environment, with low metal prices, an uncertain market outlook and the strength of the Australian dollar against the U.S. dollar.

And, as Alcoa maintains investment in its integrated mine-refinery-740,000-mt/y-smelter joint venture in Saudi Arabia, it has also announced smelter-capacity cutbacks in the U.S., Italy and Spain, cutting 531,000 mt from its 4.5 million mt/y nameplate capacity—which produced 3.8 million mt in 2011, representing an 84% utilization rate. An uncompetitive energy position, combined with rising raw-material costs and falling aluminum prices, led to the move, the company stated.

Energy Matters
By its very nature, primary aluminum production depends on the availability of low-cost energy. The boom in smelter output from the Middle East reflects this, while the failure of successive promoters of the Coega smelter project in South Africa to move ahead has been largely down to power-provision issues.

Across the board, aluminum producers are investing heavily in the development of new, lower-energy technology that will help give them a competitive edge in the market. In November, Alcoa announced a $2.1-billion investment in its Québec smelters that includes replacing Söderberg technology at Baie-Comeau with new equipment that will optimize power usage and cut the plant’s emissions by 40%.

Also in Québec, Rio Tinto Alcan is spending over $750 million on the first phase of an AP60 plant at its Saguenay-Lac-Saint-Jean smelter, with the aim of achieving a 40% increase in metal output per pot.

The cutting edge of smelting technology came under the spotlight during the 10th Australasian Aluminum Smelting Technology conference, held in Launceston, Tasmania, last October. In a keynote presentation, Xiaoling Liu from Rio Tinto Alcan set the scene for the need for innovation. “Input costs for aluminum production continue to rise across the world putting upward pressure on the cost curve,” he said. “Global energy costs are increasing as economies develop. In addition, some countries are starting to put cost mechanisms in place to reduce carbon dioxide emissions, which will lead to a source of differentiation between regions in the short-to-medium term. Raw material costs are escalating for all producers, driven by a number of the same factors—energy and labor costs, strong currencies—as well as a tightening of the market for commodities such as anode-grade coke.”

As an example of the way in which companies are pushing at the boundaries of current technology, Ali Zarouni and colleagues from Dubai Aluminum reported on experience gained with increasing the amperage on a trial potline from the design 220 kA to 260 kA, which raised the anode current density from 0.88 to 1.05 A/cm2. This, they said, resulted in a current efficiency of 95.4% and energy consumption below 14.18 kWh/kg of metal.

Similarly, Evan Andrews and other authors from Rio Tinto Alcan’s Tomago smelter in New South Wales reported on the introduction there of 240-kA AP24 cell technology which, they said, had resulted in specific energy requirements reduced to 13.3 kWh/kg. Meanwhile, improvements at Aluminerie Alouette in Québec have brought specific energy needs down to 12.7 kWh/kg, other authors noted, with work in hand aimed at reducing this further to 12.5 kWh.

Stability or Insecurity?
Despite the continuing rise in Chinese demand for aluminum, the large stock overhang—a considerable proportion of which is reportedly tied in to the financing for new projects—and falling prices have led the major producers to start culling higher-cost capacity. As explained on p. 42, Rusal estimates that some 3.9 million mt of capacity will be either closed or suspended this year, exacerbating a situation that already has the industry working at less than four-fifths nameplate capacity.

However, Alcoa has predicted that increasing demand, combined with market-related production cutbacks, will result in the market showing a 600,000-mt deficit in 2012. This will clearly lead to a drawdown on some stocks, although still leaving a substantial tonnage in the LME’s warehouses and elsewhere. Whether this deficit is enough to restrain further price falls or not, remains to be seen.

Outside China, much depends in the short term on general economic conditions—whether European demand continues to be subdued as the euro currency crisis either develops or is solved, for instance. Recent positive signals from the manufacturing and housing sectors in the U.S. should form a foundation for new aluminum demand, while U.S. car manufacturers reported higher sales for 2011 than the year before.

What seems to be firming up is a continuing trend toward higher smelter capacities that can optimize energy usage in metal production. Value addition is also becoming more important, not only in conventional terms, but also through smelting higher-value aluminum using lower-value energy, as in the Middle East. While demand growth continues to underpin capacity expansions, the fact that this capacity is still being so under-utilized bodes ill for many older plants around the world, with the high costs of entry into the industry forming a barrier to new entrants unless they have both energy and financing—in plenty.