Novelis forced to sell aluminum farther afield as China demand wanes

NEW YORK Fri May 16, 2014 4:31pm EDT

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NEW YORK (Reuters) - Weaker Chinese demand and overcapacity in the can market will force Novelis Corp NVLXC.UL to find new markets outside of Asia for the aluminum sheet produced at its newly expanded South Korean rolling mills, Chief Executive Officer Phil Martens said.

Challenging conditions in China, the world's second-largest economy, have forced the world's No. 1 flat-rolled aluminum producer to put investment in Asia on hold for the foreseeable future, Martens told analysts on a conference call.

He was speaking after Novelis reported net income in its fiscal year to end-March halved to $104 million on a slight drop in sales to $9.8 billion.

His comments come after an aggressive expansion in the region - Novelis will commission its automotive plant in China this year and last October completed a $400 million expansion at its two rolling and recycling plants in South Korea which supply the electronics and beverage can market.

"We're comfortable with that investment, (but) we have decided not to deploy more capital in Asia," he said.

Some 40 percent of Korean material stays in the country, with a portion heading to countries in the region, including Thailand and Australia, Martens told Reuters by telephone after the conference call.

Some metal heads to Europe and the United States, but Martens said the amount will be higher than expected. The Korean plants will also supply coils to the Chinese plant.

The downbeat outlook will reinforce concerns about China's economic slowdown after a decade of meteoric growth that has fueled demand for industrial metals.

Demand for fizzy drinks in China has slowed, increasing concerns about overcapacity of flat-rolled aluminum used to make beverage cans, Martens said. North America and Europe are also in surplus, but oversupply will ease more quickly than in Asia.

Novelis has been switching can sheet capacity in the United States to automotive sheet to feed burgeoning demand from carmakers. Automotive will account for about a quarter of Novelis' business by the end of the decade, Martens said.

The comments are likely to fuel concerns about the impact of record-high premiums on end users' margins and primary smelting output.

Premiums paid on top of the London Metal Exchange benchmark for physical delivery of metal have skyrocketed in recent years, hitting all-time highs this year due in part to logjams in London Metal Exchange warehouses.

Those healthy physical premiums have helped cushion the damage from low LME prices, hurt by massive oversupply. That has deterred many producers from making capacity cuts that many market participants say are needed to rebalance the futures and physical markets.

Novelis, a staunch critic of the LME's handling of the crisis over long wait times in its vast network, has said soaring premiums related to the LME's warehousing policy cost the industry billions of additional dollars a year.

Second-quarter premiums in Japan were around $365 million to 370 million, a record high and up a whopping 45 percent from the prior quarter. U.S. and European are also at all-time highs.

(Editing by Matthew Lewis)

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