LONDON (Reuters) - Non-Chinese aluminum production was unchanged in January, according to the latest figures from the International Aluminum Institute (IAI).
Producers, it might be inferred, are still holding the line in terms of keeping capacity off-line in the face of low prices and historical stocks overhang.
Their continued discipline is a subject of much market conjecture, although the fear of restarts waxes and wanes with the price.
A combination of lower London Metal Exchange (LME) basis price and softer physical premiums, particularly in Europe, has seen the all-in price slide back to just above $2,100 per tonne from over $2,450 as recently as November.
That should, it follows, deter anyone from breaking ranks.
But current regional production dynamics are more complex than a simple linear reflection of price.
New plants are ramping up even as older ones shutter up. Others are waiting in the wings. Capacity has already been restarted and expanded in Western Europe.
And all the while China, where production is still trending steeply higher, is pumping out exports and undermining the price impact of others’ self-discipline.
The chart above, showing the change in annualized production in January compared with a year earlier, captures some of those divergent dynamics.
Aluminum output in Latin America, for example, has still been steadily falling over the last year, largely due to continued contraction in Brazil, once the region’s largest producer.
Indeed, the last announced mothballing of an aluminum smelter was that of the small Ouro Preto smelter owned by Novelis [NVLX.UL] in October. Novelis attributed the decision to close in part on “systemic issues affecting the entire primary aluminum industry in Brazil impacting cost of operations and overall competitiveness.”
Annualized production in Africa, Oceania and North America was also lower year-on-year in January but to a lesser extent because the impact of previous shutdowns is now starting to fade.
In Western Europe, by contrast, annualized run-rates have been creeping higher. January’s output was 212,000 tonnes higher than a year ago due to a combination of restarts and expansions.
Each tells its own story, although the underlying theme is achieving viable power costs in a region of high electricity prices.
Norway’s Hydro, for example, benefits from the fact, as the name implies, it is the country’s second-largest generator of hydroelectric power.
It is restarting 50,000 tonnes per year of capacity at its Sunndal smelter, although the additional production will be offset by a reduction in remelt (scrap) activity. The change in primary metal output shows up in the IAI’s figures, while the offsetting change in remelt doesn’t.
German operator Trimet, meanwhile, has swooped on the Voerde plant in Germany and the Saint-Jean smelter in France, saving both from what looked like imminent closure.
Production at Saint-Jean has just been raised back up to nameplate capacity of 145,000 tonnes per year from under 100,000 tonnes.
Trimet’s strategy for resurrecting doomed aluminum facilities appears to derive from a combination of rejigged power supply deals and a shift of output focus to products from commodity-grade metal.
The cost of power is a key determinant of an aluminum smelter’s profitability and the ability to navigate Europe’s fractured tariff matrix explains why Klesch is planning on reactivating the Aldel plant in the Netherlands this year.
Western European production has probably bottomed out.
Those smelters who have survived the last few years are now more likely to maximize capacity than shutter again. Hydro is even planning a new 75,000-tonne per year pilot plant using new technology with start-up penciled in for 2017.
Still, a couple of hundred thousand tonnes of restarted capacity is not going to make much impact in a 50-million tonne global market, particularly if that output is in the form of products.
More worrying would be a systemic reactivation of capacity at the two non-Chinese giants, namely Alcoa and UC Rusal.
Alcoa had around 665,000 tonnes of annual capacity idled at the end of last year.
Rusal has idled four of its Russian smelters and cut run-rates at five others. Group production last year was 3.601 million tonnes, a reduction of 256,000 tonnes from 2013 and of 572,000 tonnes from 2012.
Each has adopted a market-leader stance, claiming to lead from the front in terms of correcting the production excesses of the past.
Behind the rhetoric, though, is a more Darwinian instinct to achieve a more competitive position on the global cost curve.
Alcoa, for instance, has shifted a significant part of its production profile from the higher-cost U.S. to the low-cost Middle East.
Its new Ma’aden smelter in Saudi Arabia is a core part of that strategy. The plant produced 600,000 tonnes of aluminum last year, almost as much as the idled capacity elsewhere in the company’s portfolio. The smelter has been operating at full 740,000-tonne per year capacity since the middle of last year.
Ma’aden has been a key driver in the explosive growth in Gulf production over the last year with annualized output rising by 850,000 tonnes in the year through January.
Rusal has a similar option in the form of its Boguchansk smelter, part of a joint venture with RusHydro. The 3,000-MW hydro plant component was officially completed in December last year.
The timing of the start-up of the associated 600,000-tonne per year smelter is still up in the air. It was supposed to happen last year. It may happen this year, according to Russian media reports.
Rusal, though, said in its 2014 operating results its production this year would be flat on last year.
Rusal’s call on starting up Boguchansk will likely be determined by a combination of domestic and international considerations.
Neither is likely to be a function purely of price.
Domestic pressures will come from its joint venture partner, its lender, VEB bank, and ultimately the Russian government.
International pressure will come from the potential loss of market share to Chinese exports.
China’s January production figures are not out yet due to the Lunar New Year holidays.
They may be up or down on December. The figures tend to be extremely volatile on a monthly basis. But the trend is not. Production is still trending clearly higher, up 9 percent last year. So too are exports of fabricated products, up 19 percent last year.
The continued flow of surplus metal out of China, albeit in semi-manufactured form, is one element depressing prices, particularly physical premiums in the Asian market.
The dilemma for major non-Chinese producers is whether they are losing market share to Chinese players, many of whom are benefiting from subsidies in the form of lower power tariffs.
Reactivating shuttered capacity or starting up new capacity might seem highly risky given the continued low-price environment.
But then OPEC choosing not to cut its own production to defend oil market share might also look foolhardy given the pain of low oil prices.
Basis the current all-in price, no idled aluminum production should be restarted.
But it already is being restarted in Europe. And it is being actively shifted to new plants in lower-cost regions such as the Gulf or, potentially, Siberia.
Global aluminum production trends are a function of many moving parts. Outright price is only one of them.
Editing by Susan Thomas