Through Lens of Rio Tinto Alcan, Aluminum Not Part of Super Cycle

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It’s good to see how wrong some captains of industry get things at times. Not, I hasten to add, out of any sense of schadenfreude, but simply because it makes us feel in good company.

While Rio Tinto received words of warning from various quarters prior to the (with hindsight, eye-wateringly high) $38.1 billon price they paid for Alcan back in 2007, they still went ahead with it and shareholders have since suffered the consequences.

Jack Farchy in the FT details the destruction in value that has befallen Rio Tinto since, to illustrate the wider malaise of the aluminum market. Just two years later, Rio was forced to raise $15.2 billion from shareholders and has since written down their aluminum assets by $8.9 billion.

Dick Evans, then the Alcan chief executive, is quoted as having identified two mistakes. The first was simply that Rio Tinto did not anticipate the financial crisis, which put a brake on global commodity demand and caused prices to collapse.

No great criticism there, but Rio also misread the market. Evans is quoted as saying of Alcan’s board, that they recognized aluminum had nowhere to go and “would have accepted 20% less than the final price.” They knew what Rio (maybe with their background in iron ore and copper) did, that aluminum was not part of the super-cycle and although demand was rising fast, supply was rising even faster.

Even though the global aluminum market has increased from 1.5 million tons in 1950 to 44 million tons in 2011, the valuations of the leading producers by output – Rusal, Alcoa, Rio Tinto, Chinese Chalco and Norsk Hydro – have collectively collapsed from almost $200 billion five years ago to about $65 billion today and profits have proportionately slumped.

Nor, says the FT, is there any end to the situation soon. With conservatively some 10 million tons of aluminum inventory around the world, the market is technically well-supplied, although in the short- to medium term, that metal is locked in financing deals.

Maybe of more consequence is the structural shift in the supply side that has taken place.

Continued in Part Two.

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