Alcoa says output cuts drive cost reduction

NEW YORK Tue Jan 8, 2013 9:08pm EST

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NEW YORK (Reuters) - Production cuts and closures carried out this year have helped Alcoa Inc (AA.N), the world's largest aluminum producer, to move 4 percentage points down the aluminum smelting cost curve, its chief executive said on Tuesday.

This pushed the company closer towards a key five-year target of moving 10 percentage points down the global aluminum cost curve from 51st percentile in 2010 to 41st by 2015, underlining its bid to become a more competitive producer.

"With production curtailments in Spain and Italy we have moved down the aluminum cost curve," chief executive and chairman Klaus Kleinfeld told analysts on a conference call following the release of the aluminum giant's fourth quarter results.

In the face of lower aluminum prices Alcoa cut 240,000 tonnes per year of smelting capacity in Spain and Italy and permanently closed 291,000 tonnes of capacity in the United States in 2012.

Reducing production costs is a must to remain competitive in a market which is seeing supply increase dramatically, analysts said.

Alcoa, however, expressed cautious optimism that demand for the metal will continue to grow in 2013, helped in part by global growth in the aerospace and construction markets, essentially balancing strong supply growth.

Kleinfeld also said he expects financing deals to continue to soak up large amounts of aluminum, while premiums -- money paid over the benchmark London Metal Exchange (LME) cash price to secure physical metal -- should remain strong.

In financing deals, traders or banks buy the metal from producers then sell it for future delivery to speculators at a profit, in a market spread known as 'contango', when futures prices are higher than spot prices for immediate delivery.

This practice, which has locked record amounts of aluminum in metal warehouses in the last few years, has made it more difficult for industrial users to get hold of the metal, pushing the regional premiums to record highs in 2012.

"Aluminum held by financial investors is a function of the contango and of the low interest rate environment... There is confidence that this environment will continue," Kleinfeld said.

"We are we not concerned about investors stopping to buy metals. The moment that happens is when interest rates go up. This will happen only when the economy picks up again and when the world economy picks up you have a compensation through a physical demand pick up."

Kleinfeld said aluminum prices might rebound in 2013 if macro conditions improve as expected, adding that prices remain largely driven by macroeconomic news rather than fundamentals.

(Reporting by Silvia Antonioli; Editing by Richard Pullin)

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