The Hindu Business Line : Aluminium output cut unlikely to stem price fall

Mumbai, Nov. 3 Despite the sharp cut in global production, aluminium availability is expected to be in surplus till 2009. In the first half of 2008, the metal was in surplus of 7.59 lakh tonnes, leading to high inventory in the London Metal Exchange and sharp fall in prices.

With the current aluminium prices hovering at $2,050 a tonne in LME, about 75 per cent of smelters in China, the US and Europe are operating well below their break even level of $2,500 a tonne. Taking a cue from the sharp fall in prices, aluminium producers globally have decided to cut production by 6.79 lakh tonnes (lt).

It is widely expected that the capacity of 1.5 million tonnes a yearbeing added in China over the next six months may be delayed by a few months due to the global economic slowdown. The delay in capacity addition may not lead to a rise in aluminium prices as the demand has also fallen sharply, said an analyst.

Demand slowdown

China, the key demand driver for aluminium, accounted for 32 per cent of the global consumption in 2007 and 90 per cent of the incremental aluminium consumption growth. Chinese aluminium consumption in the first half of 2008 has grown 8 per cent compared to 46 per cent recorded in 2007.

Similar fall in demand from the realty and automobile sectors was witnessed in the US due to the recessionary trends. “For instance, car production in the US is expected to fall 25 per cent to 12 million a year against 16 million a year,” he added.

Barring China, aluminium consumption growth is static around 3 per cent. US-based Alcoa Inc expects aluminium consumption in North America to contract 5 per cent in 2008, as automotive and construction sectors remain weak, said Mr Prasad Baji, Research Analyst, Edelweiss.

Production cuts

Globally, aluminium production has been adversely affected due to inadequate power supply. Electricity cost accounts for 35-40 per cent of aluminium production cost.

According to International Aluminium Institute (IAI), world production growth in aluminium has slipped in first eight months of 2008 to 6.7 per cent from 12.3 per cent growth in 2007.

In July, the top 20 Chinese aluminium producers, constituting 70 per cent of Chinese production, agreed to cut their smelter output by 5-10 per cent till September. In a move to discourage export of energy-intensive industries, the Chinese Government recently imposed export tax of 15 per cent on aluminium alloys. BHP Billiton has decided to cut smelter capacity in South Africa due to power shortage.

Cost push

Aluminium production is energy-intensive. Nearly 15,000 KWH is required to produce one tonne of aluminium. Overall, at least 50 per cent of global smelters depend upon coal-based electricity grids to draw power for aluminium.

The acute shortage of thermal coal has resulted in long-term contracts being settled at $125 a tonne, up 125 per cent from last year. Coal on spot basis has touched a high of close to $200 a tonne and has recently come down to $125 a tonne against $95 a tonne last year. This huge increase in coal prices has resulted in increasing electricity costs for aluminium smelters.

Further, coal supply in South Africa was affected due to heavy rains, which prevented movement of coal. Over the years, China has closed down thousands of coal mines due to safety issues. On July 1, China raised average electricity tariffs by 4.7 per cent and in August further hiked on-grid tariff by 5 per cent. The increase in energy cost has raised the aluminium production cost by $400 a tonne for Chinese producers.

Power needs

In contrast, Indian aluminium smelters have captive power plants to meet its power requirements and, in general, have lower power costs. Coal is supplied for these power plants mainly through linkages from Coal India.

Short supply by Coal India of late has led to aluminium producer to depend on e-auction and imported thermal coal. The production cost for Indian aluminium producers was between $1,600 and $1,800 a tonne.