Alcoa's Kleinfeld sees 2012 aluminum deficit

NEW YORK Mon Jan 9, 2012 10:04pm EST

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NEW YORK (Reuters) - Alcoa Inc (AA.N) Chairman and Chief Executive Klaus Kleinfeld expects the global aluminum market to turn into a deficit this year, as biggest consumer China closes inefficient capacity even though demand remains robust.

At a conservative estimate, the global deficit will be some 600,000 tons, he told analysts on a conference call following the release of the aluminum giant's fourth-quarter results.

"Our assumption for the 600,000 ton deficit in the primary market, (is based on) our assumption that 1.1 million of China's 5.7 million tons of unprofitable capacity will be taken offline," the executive told analysts.

Alcoa estimates China's 2012 aluminum deficit will total 850,000 tons, whereas the rest of the world's supply/demand balance will result in a 250,000 ton net surplus, for a global deficit of 600,000 tons.

He forecast Chinese aluminum demand will grow 12 percent this year, while the Asian nation's GDP is expected to rise between 8 and 9 percent and 8.5 percent next year.

In 2011, China's aluminum consumption grew by 15 percent.

China consumes over 45 percent of global aluminum output.

Even with a brisk economic pace, China's local aluminum industry faces structural problems, including high costs as smelters have to import raw materials, energy constraints and environmental issues with many of its smelters fired by coal.

That means, one-third of Chinese production, or as much as 5.7 million tons per year of output, is loss making, he said, stressing that Alcoa's estimates were made on cash basis and do not include non-cash items like depreciation.

"In the end, the pain level comes when you see cash flowing out the door and 5.7 million tons of Chinese production is cash negative," the executive said.

Specifically, Henan province runs 280,000 tons of capacity that would likely close soon because of drought conditions there that have impacted hydro power plants.

Another 630,000 tons would shut "pretty soon" based on a report by China's economic information center, with another 200,000 tons coming offline that Kleinfled said he had discussed previously where closures were already "in progress."

Citing old technology at inefficient smelters, he said China may close another 1.2 million tons of capacity assuming the metal price remains around current low levels.

"Anybody who would care about using resources wisely would take these offline sooner rather than later," the CEO said.

If China takes any of this next tranche of smelters offline, Alcoa's deficit prediction would increase and metal prices would benefit, the aluminum chief said.

Even if the aluminum price firms, he said, "that does not mean everything in China is suddenly rosy."

"The Chinese aluminum industry has a structural problem that will not go away and that will lead to structural consequences independent of where the metal prices is, mainly how to use the energy in a country that is not energy rich."

He gave a generally positive assessment of the overall market, forecasting global aluminum demand will rise 7 percent this year and reiterating global demand should double by 2020.

Alcoa estimated a 10 percent global growth pace for 2011. Excluding China, it forecasts 2012 demand growth of 4 percent.

"We do see an air of confidence returning to the economy," he said in an earlier interview on CNBC TV, referring to rising U.S. consumer confidence and manufacturing data and falling bond yields in Europe.

Even so, 2011 was a "bumpy" ride with "massive headwinds", he said, blaming the Pittsburgh-based aluminum producer's fourth-quarter loss on charges for cutting back production and softer market conditions.

(Reporting By Josephine Mason and Carole Vaporean; Editing by David Gregorio, Bob Burgdorfer and Bernard Orr)

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Comments (1)
KalvinGrey wrote:
Then why is Alcoa cutting production by 500K+ tons in 2012? That’s over $1B in lost revenue on the top line. Sorry, not buying your spin, KK. Your stock price is flat the next 2 years according to the LME.

Jan 10, 2012 11:07am EST  --  Report as abuse
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