Alcoa Exceeds Expectations as Production Capacity is Cut in China

by on

Two separate reports appearing in a Reuters publication support comments made in MetalMiner over recent weeks regarding the aluminum market. The first report was a review of Alcoa’s second quarter earnings which surprised the market on the upside with stronger than expected results. Alcoa Chairman and Chief Executive Klaus Kleinfeld increased his estimate of 2010 global aluminum consumption growth from 10% to 12%.

“We’ve raised the demand projection, but at the same time we’ve seen that additional production came online so we continue to believe that we’re going to have a surplus this year of roughly about 1.2 million tons,” he said. That did not include China, which he said has halved its surplus from 400,000 tons in the past month. Production capacity is again being cut around the world as the primary ingot price has slumped. Kleinfeld observed that at the depressed Shanghai pricing level, “roughly 6 million tons of aluminum capacity in China is below the waterline. “We expect that very soon, most likely in the third quarter, we will see 1 million to 1.5 million tons coming offline.”

So good news for aluminum producers but a hint perhaps to consumers that prices this summer could be at the low point going forward. If as Kleinfeld suggests the market goes into deficit next year, aided some think by a one million ton ETF fund being launched later this year, prices are likely to rise back above $2000 per metric ton.

China’s producers are being squeezed by a double whammy. On the one side, ingot prices have fallen from $2400 per ton in April to $1950 per ton now, but on the other side costs have risen significantly, particularly power costs. When Klaus Kleinfled says roughly 6 million tons of capacity is below the waterline it is as much due to recent rises in electricity costs as anything. China has vowed to cut energy intensity (energy consumption per unit of gross domestic product) by 20% by end 2010 from the levels in 2005 and to cut two key pollution measures, sulfur dioxide and chemical oxygen demand by 10% during the same period. But energy intensity actually rose by an annual 3.2% in the first three months of this year after falling 14.38% in the previous four years, because of fast growth in energy intensive sectors including electricity, steel, non-ferrous metals, construction materials and petrochemicals. The government has therefore raised power tariffs by 50-100% for some energy intensive firms from June 1 and cut or even ended power price discounts for many others, notably aluminum smelters. At the same time, task forces have been dispatched around the country to monitor compliance a problem with past edicts from Beijing being quietly ignored by provincial governments. Smelters have already started closing in central Henan province as we previously reported while others have been idled on a rolling program disrupting output. Heavy industry will have to take the brunt of government efforts to curb energy efficiency consuming as it does 60% of electricity produced in China compared to just 12.5% in residential consumption.

China is not alone in facing closure of significant portions of its aluminum industry. In most other markets constraints to supply will be more due to the current low aluminum price than rising power costs but with China being such a major producer and consumer, Kleinfeld is probably right in saying the impact of rapidly rising power costs in China will have a special dynamic on the wider aluminum market as a whole.

–Stuart Burns

Comments (2)

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.