January 16, 2012 at 2:18 am #1979
Analysis: Aluminum traders to producers: Cut like it’s 1994
By Josephine Mason and Karen Norton
NEW YORK (Reuters) Jan 7, 2012 – To find a precedent for the deep, lasting output cuts that aluminum producers must make to put a floor under prices, traders are looking a lot further back than the last recession.
Three years ago, with the global economy convulsing in the throes of a serious recession, smelters worldwide started cutting back production — temporarily. As prices quickly rebounded, nearly doubling within a year, those companies were just as quick to fire up their furnaces again.
With the overhang of high inventories and a 28-percent drop in prices since May last year, they’re responding again, with Pittsburgh-based Alcoa announcing on Thursday plans to shut down 12 percent of its capacity, some of it permanently.
But traders may not be so readily appeased as three years ago. Many say that much deeper, longer-lasting cuts — more akin to the post-Soviet government pact of the mid-1990s — will be required in order to rebalance a market.
“We believe that disciplined action by the industry is required to reduce the overhang that exists,” analysts at Dahlman Rose & Co said on Friday.
They said Alcoa’s action would be a wake-up call, with further cuts likely to come from relatively higher-cost producers in China, which represents some 40 percent of global capacity.
Alcoa’s action appeared to mark a step in the right direction. Some 291,000 tons of annual capacity that it had idled in 2009 will now be shuttered completely, removing the threat of a quick restart that could sink the market once again. It will also curtail another 240,000 tons of annual capacity in production at undisclosed locations. The closures equate to just over 1 percent of the 46-million-tonne per year market.
London Metal Exchange aluminum prices rose only $10 to $2,039 per ton on Friday, signaling that much more would be required to revive a market that’s fallen by more than a quarter since last May.
One particularly frustrated trader said cuts need to be greater than in 2009 when at the height of the global economic crisis global output fell by just over 2 million tons to 37 million tons, according to Reuters data.
Market conditions have deteriorated in the last six months, particularly in Europe where demand has ground to a halt due to the debt crisis in the Euro zone, and concerns have mounted about weakening Chinese consumption.
In November, Alcoa announced it would perform unplanned maintenance on some flat-rolled facilities in North America and Europe due to a dramatic reduction in orders.
“The only good news will be if it prompts others to follow suit a bit like 1994,” said a dealer at a ring-dealing member of the LME.
So far there appears little rush. Norwegian producer Norsk Hydro (NHY.OL) told Reuters on Friday it was prepared to lower output if prices remain low, but other major producers including Rusal, Rio Tinto Alcan and BHP Billiton declined to comment.
Rusal and Rio Tinto Alcan both operate smelters using lower-cost hydro electric power-Rusal in Siberia and Rio Tinto in Canada-which means they can withstand the lower prices for longer.
This time around, cuts may need to be deeper and more sustained than in 2008, for several reasons.
The speed of aluminum’s recovery in 2009 took the market by surprise – from the depths of $1,300 per ton in early 2009, prices surged over 80 percent in value within a year to $2,400 per ton largely on stronger-than-expected demand from China.
But supply also responded and by 2010, global output had already risen to a new high of 40.7 million tons, driven by China’s investment in its own smelters and by forecasts of long-term demand growth.
“The price recovery was too quick for anyone to take long-term action. Back in 2010, it looked like we need more metal for Asia,” said a senior executive at a large consumer.
Low interest rates have also played a role in creating the massive inventory that overhangs the market, with almost 5 million tons in LME warehouses and a similar tonnage estimated by traders to be sitting in off-warrant storage — enough to cover global demand for three months.
Incentives by warehouses to lure metal into their storage have given traders a reason to dump unwanted metal, lock it up in financing deals and earn money on the spread — giving producers less of a reason to slash output.
“The market was oversupplied even in 2008. The industry was still creating inventory but just at a slower rate,” said a European trader frustrated at the size of the LME stocks, particularly in Detroit and Vlissingen.
Memories of 2008 are still painful, but those with longer careers also remember the turmoil of the early-1990s when the former Soviet Union flooded the market with material following the collapse of the Berlin Wall.
By 1993, that surge had annihilated prices to close to $1,000 per ton and the industry, dominated at the time by Europe and Canada, was on its knees.
In an unprecedented move, the governments of the European Union, the United States, Russia, Norway, Australia and Canada, all of which are leading producers, hammered out a voluntary agreement known as the “Memorandum of Understanding” in early 1994 to try and revitalize their countries’ manufacturing sectors.
The governments came to an understanding that capacity by their countries would be reduced. Russia agreed as much as 500,000 tons, with the cutbacks that year totaling some 1.2 million tons, according to the U.S. Geological Survey. That equated to about 6 percent of total global output.
The result of the deal transformed the fortunes of the global industry in an astonishingly short period of time.
“Producers colluded through the arms of their governments,” said the senior executive, who worked for Alcan at the time remembering the deal. “The price was $1,072 in November 1993 and peaked at $1,295 in January 1995.”
Such an audacious move may not be possible in 2012 given anti-trust laws and the dominance of China in the aluminum industry, but some say the industry could learn lessons from the principals behind the MoU of an industry-wide move.
But with Liberum Capital estimating that almost a third of global primary smelting capacity is loss making at $2,000 per ton, additional industry smelter closures look likely.
“Once you start to see producers bleed you know you’re coming close to fundamental support,” said Andrew Keen, Global Head of Metals and Mining Equity Research at HSBC. “People don’t produce for free. I would imagine a lot of producers are navel-gazing at the moment to see if they should turn off or not.”
January 16, 2012 at 2:22 am #4761
Here is a really ominous article for both Aluminum industry smelters and the Refinery Green Anode producers.
If traders and market prices are looking for cuts larger than those made during bottom recession and expecting it to be levels of 1994, then its doubtful much of western production is going survive. This article also claims current smelters are still losing money at $2000/mt price level – a long way above 2008’s $1300/mt and barley above its 2009/10 recovered price $2400/mt.
The traders calling for 1994 level cuts are of course idiots – its way too early to jump off the building for that level amputation, save it for consolidation coming as Middle East and China smelters fight to maintain the market share they have over-produced to gain.
This article also has short but good recap of Soviet collapse Berlin wall & along with it global aluminum industry as market tried make room for metal no longer pointed at military demands.
The article also has right term on the 1994 event – aluminum producers did collude thru the arms of their governments using a “MOU” to carry out price fixing and circumvent anti-trust laws they destroyed other industries with. It is joke that just few years afterward full weight governments came down upon Graphite Electrode & Needle coke producers for doing much less by comparison.
Neither governments nor Presidents/Leaders should have the right to pick & chose which laws & which industries they want to apply.
It is doubtful they will get to do repeat on 1994 MOU anyway for number reasons:
1) Global Anti-trust laws are much stiffer & not so easily circumvented,
2) China now represents nearly 40% of Aluminum market (any major producer with CR ratio above 40% indicates consolidated industry), Russia 12% and India 20% – so Alcoa/Alcan US & EU cuts wont make much of dent
3) China was 1/10th of current production back in 1994, and many of countries were already phasing out the Soderberg Smelting plants – which they were able to accelerate under MOU and those capacity cuts were already going happen but be replaced short time by modernized Prebaked new capacity. Only 1-5% global capacity today is Soderberg and majority of it is idled or process of shutting down. Cuts now will be hard cuts that end up being regional shifts with the closed plants not likely to come back.
The really bad part of this for smelting capacity will be that the lower demand and lack pricing support for anode petcoke will hasten the refineries already switching to fuel or trying keep partial anode capacity as future option from recent expansion. As I have mentioned previously since 2000 we have lost nearly 32 anode or calcinable producers – nearly 1/3 in China, many are still producing some type quality but only because of short term crude economics. Alcoa may regret using Inert Anodes as negotiating ploy & not getting some new grassroots smelters operating few potlines of Inert’s (its been over 12 years now but still only Pittsburg/Massena have few “commercial” potlines).
The US is going see lot more Canadian Crude show up in 2H 2012 thru 2013 time frame as Pipelines are reversed or connect with Cushing glut and move it into Gulf and other refineries and several of delayed major coker expansions have or will finish in 2012/2013 time frame (like Woodriver, Port Arthur, Whiting, Toledo). Other refineries are having their fates ~sealed like Yorktown sold to Pipeline company to become terminal and coker dismantled/salvaged. Prior to mid 1990’s most cokers outside the US were installed by Government owned refineries to make anode coke to support their aluminum & metals industries – so we are in effect going “Back to Future” .
It is like watching a building or bridge being demolished as charges take out one support column after another until it collapse upon itself.
January 17, 2012 at 6:15 pm #4757
Aluminium’s energy nightmare
Business Starndard / Kunal Bose / Jan 17, 2012, 00:33 IST
The point Ahluwalia made at the annual Nalco lecture is that for the country to grow at nine per cent annually, the corresponding growth of the energy sector will have to be 6.5 per cent. The problem is Indian energy prices, in most cases, are at a large discount to world prices. Logically, we should all be braced for energy prices revision across the board in the post elections to five states.
Nalco Chairman B L Bagra, however, says We are already feeling the heat of coal price rises. In February last year, coal prices for captive power plants (CPPs) were raised 36 per cent. And this month, we have been served notice for another 26 per cent hike in fuel rates. As a result, the share of energy in Nalcos total cost of aluminium production is to rise to 35 per cent from 30 per cent. In one push, the cost of making the metal goes up by Rs 3,500 a tonne. What, however, remains unexplained is why the price rise burden should be more CPPs that Nalco and many others own than independent power producers.
On completion of its last round of expansion, Nalco is owning 1,200 Mw capacity to support a smelter of 460,000 tonnes. Under a linkage plan, the company is to receive 14,000 tonnes of coal a day from Mahanadi Coalfields, a CIL subsidiary. Supply is normal now allowing Nalco to build coal inventory equal to 15 days requirements. But, coal supply became so erratic during the last monsoon that Nalco management was left with no option but to decommission some of its 960 operational pots. We still have 120 pots rested. I could have run these pots with expensive imported and e-auction coal or by buying very expensive grid power. But at the prevailing low aluminium prices, I will not find justification for that, says Bagra. As luck would have it, at the time of its founding, Nalco opted for coal linkages instead of owning coal blocks. For that one fatally wrong decision, the aluminium maker is now condemned to putting up with increasingly high energy bill.
Aluminium of late is encountering biggest cost push on energy account. At the same time, other inputs like coal tar pitch, carbon and caustic soda are becoming increasingly expensive. To give one instance, pitch prices are recently up 26 per cent. I dont think we are going to get relief from raw materials price rises anytime soon. Remember, it is because of the unremitting cost push that aluminium is seeing a new bottom at $2,000 a tonne, according to Nalcos director Ansuman Das. The Ahluwalia message of relentless pursuit of doing things with less and less energy seems to have gone down well with the Nalco board. Otherwise why should Bagra be straightaway closeted with his directors to do a review of areas where economy in energy use is still possible.
Nalco had a good start because both at alumina refinery and smelter it had the benefit of technology from Pechiney, now part of Rio Tinto. But have not some technology breakthroughs since Nalco was commissioned passed the company by? We had success in cutting energy use by extending the life cycle of anodes. Earlier anodes could be used for 68 tappings. Now we are doing 72 tappings before changing anodes in smelter pots. The cycle is further sought to be extended to 76 tappings, says Bagra. Anodes are large carbon blocks used as electrical conductors.
An area where energy is generally wasted is by way of leakage of heat in smelter pots. Bagra claims that such leakages at Nalcos smelter have been capped by tightening the lids on pots. We are driving longer pins through the lids to keep these firmly shut. What all the three aluminium makers in the country Hindalco, Vedanta and Nalco should have are resource efficiency maps covering areas like energy use and water consumption and greenhouse gas emissions. International Aluminium Institute says most smelters operated by its members are using powerful scrubbing equipment to remove emissions from pots.According to Ahluwalia, since water is becoming a highly scarce commodity, the industrys challenge is to do with less and less water and also invest adequately in its recycling. At our power complex, we are doing 100 per cent water recycling by sending out ash in slurry form. But when we bring back the quenched water from ponds through a pipeline, we lose a portion of that because of tapping by villagers for farming, says Bagra. Should Nalco be taking this as part of its contribution to community welfare?
January 17, 2012 at 6:18 pm #4756
Here is India Nalco Aluminum industry update on Energy/Power but shines light on cost increase of Pitch, Anode coke & water resources.
In the coming Aluminum Smelter Industry cutbacks & consolidation – India & China with high power and raw material cost arent going to be exempt from fallout either.
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