 Cooling Off
By Maya Payne Smart Strong growth and record profits have spurred a round of refinery and smelter projects. Will surpluses spoil the party? The big concern in the aluminum market for much of this year was tight supplies. Strong demand drove up prices for all nonferrous metals, including primary aluminum. Meanwhile production bottlenecks caused a spike in the price for alumina—the raw material used for aluminum. But the supply deficit is being erased quickly, and the aluminum market is poised to swing into a surplus in 2007. The metal had been on a roller coaster ride as production shortfalls, commodity market speculation and robust Chinese demand pushed the benchmark price for primary aluminum to an 18-year high $3,275 per metric ton on the London Metal Exchange in May. But then, aluminum prices fell by more than 20% in the subsequent months as the production deficit narrowed and speculation in the aluminum futures market cooled. While underlying demand for aluminum remains strong, surplus production could be possible in 2007 if all of the anticipated aluminum product expansions make it on line. From Latin America to Russia, smelter projects for primary aluminum and refinery projects for alumina are in the works. In October, New York-based research company CPM Group projected the world aluminum market would be in a 123,000-metric-ton deficit during 2006 even though aluminum production is rising. CPM base metals analyst Catherine Virga projects the market will return to a surplus of roughly 100,000 metric tons for primary aluminum next year. Virga is in line with the consensus estimate that the modest deficit is likely to shift to a surplus in 2007 that could widen in 2008 and 2009. Relief for The Upstream Bottleneck Alumina, the raw material used to produce aluminum, has shifted in recent months to a surplus, reversing a deficit that could foreshadow a change for primary aluminum as well. Virga says the slight alumina surplus already is here, thanks to increased production in China. “We saw China producing more alumina, and this contributed to a surplus that is projected to grow in 2007,” she says. CPM forecasts the surplus could grow to a range of 500,000 to 1 million metric tons. Production bottlenecks, along with skyrocketing global demand, pushed alumina into a deficit and sent prices soaring in 2005. Australian alumina prices climbed as high as $650 per metric ton in April before beginning a steep decline to $290 in early October, Platts Metals Week data shows. Major alumina producers, including Aluminum Corp. of China (Chalco) and India’s National Aluminum Co. (Nalco), are scrambling to address the profit declines and stock tumbles that have accompanied the price drop. Chalco lost 30% of its market value on the Stock Exchange of Hong Kong between May and September, and Nalco’s shares plunged 29% between April and September on the Bombay Stock Exchange’s metal index. Prices may go even lower as more refining capacity comes on line in China, where there is new competition from smaller producers. Chalco’s former status as a government-supported monopoly allowed it to sell alumina at prices higher than the international market. But that ended when the Chinese government allowed other Chinese companies to help fill the domestic alumina shortfall. Overall, China’s alumina production was up 50% to 7.1 million tons in the first seven months of 2006 from the year-earlier period, data from China’s National Bureau of Statistics shows. Chalco responded to the increased competition by cutting its spot alumina sales price by 22% to $478 per ton, effective Sept. 1, just weeks after lowering its price to $616 per ton. Chalco reduced its spot prices for the raw material by another 22% to $373 in late September in response to anemic global prices and rising supply. It’s not clear that new alumina refineries in the middle of China will be sustainable because they are considerably more expensive to operate than refineries that are near the ocean or bauxite mines. Some of China’s new refining operations are reported to have higher operating costs (around $250 to $300 per metric ton) for refining imported bauxite, Virga says. “This may effectively act as a base for alumina prices.” Refinery expansions also are in progress and under consideration in other parts of the globe. In late April, Pittsburgh-based Alcoa Inc. said it was exploring whether to build an alumina refinery with capacity of between 1 million and 1.5 million metric tons per year in the Dak Nong Province of Vietnam. Brazil’s Companhia Vale do Rio Doce plans to spend $846 million to expand its Alunorte alumina refinery, which would nearly double capacity to 6.26 million metric tons by the first half of 2008. In 2005, the refinery’s production jumped to 2.57 million tons and production is expected to increase 50% to 3.85 million tons in 2006. Underlying Demand Remains Strong Despite the plunge in price for alumina, the price for primary aluminum has remained relatively strong, bolstered in part by commodity speculation based on recent shortages in energy, copper, nickel and other natural resources. But that speculation is quickly ebbing with the fall in energy prices and easing of other shortages. “At the beginning of this year, if you added all the value of commercial base metal inventory levels, it was $5.5 billion, but if you look to the amount speculators had in their positions on paper, it was $220 billion,” says Jorge Vazquez, senior analyst for Harbor Intelligence’s Aluminum Views, a market analysis firm in Laredo, Texas. “They had almost 50-times base metals in their hands than was really available in inventory levels.” Aluminum demand in China and other parts of the world played a role in the rise of primary aluminum prices in the first half of 2006. Patricia Plunkert, a commodities analyst with the U.S. Geological Survey, says increased demand from China for aluminum and other metals was a factor that led to supply shortages and the rise in commodity prices. “They were out buying more on the spot market than they had in the past, so the market wasn’t anticipating them coming out and there was not extra production out there to fill the void,” she says. “It created a shortage.” China’s double-digit annual growth rate and appetite for aluminum for construction, transportation and machinery remained strong, if not surprising, this year. Although LME cash settlement prices have fallen by more than 20% to $2,500 a metric ton from the 18-month high reached in May, they are still higher than a year ago when primary aluminum prices fell below $2,000. “We tend to focus only on China, but the truth is the United States, Europe and Japan are experiencing high rates of growth in demand, as well as the rest of the world,” Vazquez says. Virga says aluminum demand is strong in aerospace sector and the electrical industry, and is increasing for cars. Aerospace demand is projected to grow at a constant rate for the next 20 years, even though the commercial aircraft makers are experimenting with the use of composites (See “Showdown in the Skies,” Forward, November/December 2006). Aluminum is gaining share in electrical cable because of high copper prices. Alcoa predicts that the growth of rail cars, lightweight bridge decks, portable power sources and non-corrosive signage will raise aluminum demand. Also, it anticipates the development of aluminum security products, such as lightweight armor and blast-proof containers. Smelter Expansions Galore Vazquez predicts that today’s record profit margins are planting the seeds of three-year aluminum glut. “Historical prices in the last three years were giving producers the highest profit per ton shipped ever, so this motivates producers to increase production at a record rate,” he says. This has led to numerous aluminum expansions of smelter capacity, as well as additions in alumni refinery production in China and elsewhere. Cheap energy areas, such as the Middle East, India, Russia and Latin America, are expected to more than double aluminum production by 2010. Alcoa completed expansion of its Alumar aluminum smelter in São Luis, Maranhao, Brazil, in March, boosting capacity by 63,000 metric tons per year to 433,000 metric tons per year. Hindalco Industries Ltd., India’s largest aluminum producer, in May announced plans to build a 325,000-ton aluminum smelter in Madhya Pradesh, India. Mubadala Development Co. and Dubai Aluminium Co. are developing a $6 billion smelter in Abu Dhabi, United Arab Emirates, that is expected to come on line in 2010. The Saudi government in April approved construction of a $3.8 billion smelter at Ras Az Zour in Central Eastern Saudi Arabia by state-owned Maaden, which is expected to begin production in 2008. Prior to its merger with Russia’s Rusal Ltd., Sual Group announced it was investigating the possibility of building a 500,000-ton smelter in Kazakhstan. Smelters are expanding in Iceland and British Columbia, as well. Alcoa is constructing its first new primary aluminum facility in two decades, at Reydarfjordur in Eastern Iceland. The smelter is expected to be operational in 2007. The company also is studying whether to build a 250,000-ton-per-year smelter in Bakki by Húsavík in Northern Iceland that would use geothermal power and come on line in 2010. California’s Century Aluminum Co. in April announced that its subsidiary Nordural ehf would accelerate expansion of its Grundartangi, Iceland, primary aluminum plant by 18% to 260,000 metric tons per year by the fourth quarter of 2007. And Montreal’s Alcan Inc. is investing $1.8 billion in its Kitimat, British Columbia, smelter, boosting production more than 60% to 400,000 tons per year (See “The Global Resource Hunt,” Forward magazine, November/December 2006. Vazquez estimates that Russia, China and the Gulf Region, including Oman, Iran, Qatar, UAE and Saudi Arabia, each will increase production by at least 4.5 million tons, and India will increase production by at least 2 million tons within the next four years. All this expanded capacity points to excess capacity and lower prices ahead. “We’re going to see a surplus in aluminum in 2007, and this should relieve some of the pressure on prices,” Virga says. |
