More Smelter Closings Following Rockdale?

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Supply & Demand

To what extent should the announcement this week by Alcoa regarding Rockdale be seen as the start of more plant closures? Smelters cost a lot of money to construct and even mothballed a lot of money to maintain. It’s unlikely at current ingot prices we will see a significant number of smelters being taken out of production but much will depend on the dynamic interplay between demand, power costs and ingot price. If demand continues to fall, and with it the ingot price, we could see more plant closures over time. The oil price does not feed through directly into smelter power costs anywhere other than in speculators imaginations. In most cases, power costs are adjusted over the longer term.  A sudden $10/barrel rise or fall in the oil price is in itself irrelevant. But the world’s largest producing country China produces much of its aluminum from coal fired power stations.  Though thermal coal costs have peaked, they remain historically very high and even in a controlled domestic market like China contribute to their comparatively high cost of production. The first large scale idling of a plant could well be in the same market that has been creating the greatest increase in global demand. To be continued…

“Stuart Burns

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