Aluminum Production Only for the Brave

Investing in aluminum production has always been an activity for those with deep pockets. New smelter projects are measured in billions of dollars and production capacities for green-field are rarely less than 500,000 tons nowadays. Witness the latest leap of faith, this time by BHP Billiton who is reported to be looking at damming the Congo River to build a 2.5GW hydro plant and building an 800,000 ton per annum aluminum smelter fed by Guinean alumina according to Reuters. The hydro plant alone is expected to cost $3.5bn and the smelter will no doubt be a further $1.5bn+.

This decade will see a lot of new capacity coming on stream. We have previously mentioned Alcoa’s Maaden JV in Saudi Arabia, Century Aluminum is re-starting work on their 360,000 ton geothermal powered plant in Greenland. Rusal is back at full production with further enhancements in the pipeline. Emal in the UAE is aiming at 700,000 tons eventual capacity. Existing plants like Aluar in Argentina are increasing capacity by 10% this year with plans for a further 10% later.

Meanwhile the elephant in the room is China. Production last year came in at just under 13 m tons according to stats from the International Aluminium Institute but capacity is close to 20 m tons. With prices at $2250/ton plus there is certainly no economic reason why that production capacity will not follow the global trend and start up this year.

Meanwhile stocks are at or near record highs on the LME and IAI un-wrought stocks yet prices remain firm and the physical premiums remain high, held up by that gravity defying conjuring trick called long term financing. I am not sure I would be rushing to buy Vedanta’s proposed de-merged aluminum holdings rumored to be coming to market this summer as a spin off entity. Vendanta may have a low cost production in India but even their projections would be hit if there is a substantial correction in the metal price. In the long run, either the price will come down or the stocks will come down, but the level of stocks and the price cannot remain high forever, it defies common sense. The key has been long term financing which in turn has relied on the forward price curve for aluminum on the futures markets remaining at a decent premium to spot, otherwise known as contango. For the time being, there seems no reason for the game to not roll on, but as we know all too well, all good things come to an end eventually.

–Stuart Burns

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