By Andy Home
LONDON, June 7 "Production under these
circumstances no longer makes sense."
So said Ivo Bradvica, general manager of Bosnian aluminium
producer, Aluminij Mostar, in announcing the full curtailment of
activities at the 130,000-tonne per year smelter.
Aluminij Mostar has been racking up monthly losses of 9.7
million Bosnian marka ($6.5 million) since the start of the
Last year it lost 65.8 million marka and trimmed output by
12.5 percent in a bid to fend off financial collapse.
The local bauxite mines with which it was once integrated
have long gone. Local power supplies are scarce and high-cost.
The company has been dependent on a tolling agreement with
Glencore for many years.
Its curtailment is but a drop in the oversupplied 45-million
tonne global aluminium market.
But it is symptomatic of the pressures facing aluminium
smelters everywhere, pressures that are generating a new round
of production cutbacks, not least in China, where industry
leader Chalco <601600.SS 2600.HK> has announced 380,000 tonnes
Aluminij Mostar, though, is also symptomatic of why this
market's supply response to price pressures is often so lagging
and why excess capacity is likely to remain an issue for many
years to come.
If the world behaved as economists think it should behave,
Aluminij Mostar would have already closed, probably when the
London Metal Exchange (LME) aluminium price first
started eating into the global cost curve in the back end of
But it didn't, preferring to try and tough it out with at
least tacit support from the Bosnian government, even if that
support didn't extend to acceding to repeated requests for
subsidised power supplies.
While a small entity in the global aluminium sector, it's a
giant in the local economy.
It employs 900 directly and supports a small hub of metal
manufacturers, who will now face a highly uncertain future. Its
curtailment will be a major setback in a country where
unemployment last year was an estimated 28 percent.
Aluminij is not only the biggest exporter in the small
former Yugoslav republic but is the mainstay of a metals sector
that accounts for over half of national output.
Underpinning such socio-economic restraints on closure is
the historical symbolism of the Mostar plant to a country still
struggling with the legacy of the 1990s Yugoslav wars.
The complex was repeatedly bombed in April 1992, a direct
hit on the power substation finally halting all production.
Subsequently occupied by what the company's website ()
calls "the Serbo-Montenegrin aggressor forces," what was left
was then systematically destroyed.
It took five years to rebuild the plant and resume aluminium
Or, as the company proclaims on its website: "Aluminij has
You can start to understand why Aluminij has defied
cost-curve economics for so long and why curtailment has been
such a painful decision for both management and workers.
What's a bombed-out aluminium price to a company that has
literally been bombed out?
Aluminij may be an extreme example but it helps explain why
so many smelters can defy a price that on paper should put them
out of business.
Never more so than in China, where local governments have
been adept at lending a discreet helping hand to struggling
aluminium producers, most visibly in the form of power
As with Aluminij, these smelters may individually be small
from a global perspective but are often mainstays of the local
economy and, even more critically, of tax revenues to local
Which is why China particularly is burdened by
over-production and excess capacity, to the point that the
national government has also lent a helping hand, sporadically
scooping up unsold metal from its favoured producers via the
State Reserves Bureau.
On one level Chalco's curtailments are no more than a
reflection of the same hard reality that has forced Aluminij
The company booked a net annual loss of 8.2 billion yuan
($1.3 billion) last year and another net loss of 975 million
yuan in the first quarter of this year.
By shuttering higher-cost capacity, Chalco is following in
the well-worn footsteps of other major players such as Alcoa
and UC RUSAL.
At another level, though, it is difficult not to see the
hand of Beijing, using Chalco to send a broader message to the
Chalco was the original industry leader in China's aluminium
sector and although its dominance is now greatly diminished, it
retains a special status in Beijing's eyes.
The hope is that where Chalco leads, others will follow. It
is a hope shared by many others in the aluminium market, which
is partly why the LME price spiked to a near three-month high on
Wednesday shortly after the announcement.
But will others follow?
History suggests otherwise and right now what Chalco does or
doesn't do is unlikely to have much sway on the new generation
of smelters starting up in China's northwestern provinces.
IDLED OR CLOSED?
An even bigger question is how long these Chalco cuts are
going to last.
The company described them as only "temporary," part of a
"flexible" production strategy.
Again history has shown that what is cut in China can be
reactivated just as soon as the price shows signs of picking up.
Amid the string of cutback announcements made since late
2011 only a small amount of capacity has been permanently
closed. And some of that, Alcoa's 215,000-tonne per year
Tennessee plant for example, had already long been in moth
This is the difference between the problem of
over-production and the problem of structural excess capacity.
Even if the aluminium industry as a whole can curb its
current run-rates, without more permanent closures, the amount
of excess capacity in the sector will continue to hang over the
price of the light metal.
Which takes us back to Aluminij Mostar. All production will
be closed down starting this month. But is anyone going to
physically dismantle a plant so steeped in national history?
Not if the company's website is to be believed.
"The most recognisable symbol of Aluminij, and its rise from
the dead, is the water tower that was destroyed by the enemy
forces, and which today stands upright again with its slender
outline, like a guardian of the entire smelter who never sleeps,
watches over and admonishes - It is here to remain!"