For those interested in a long-term outlook for aluminum prices and the industry’s future, a new report from Boston Consulting Group (BCG), titled “The Aluminum Industry CEO Agenda 2013-2015,” succinctly distills the trends likely to shape prices for years to come.
Aluminum market observers won’t find the report shocking, but without some concerted efforts across the aluminum industry and the cooperation of government, the long-term prospects for aluminum prices remain dim.
Of course, aluminum-buying organizations may welcome that news.
The report covers the economics underlying the industry and tackles head-on the question of the 800-pound elephant in the room – overcapacity.
And, unlike steel, in which China has created far too much capacity, China does not have a glut of primary production capacity. Its goal of remaining self-sufficient in aluminum production lies in its ability to secure enough raw materials, specifically bauxite and alumina to feed its smelters.
If China fails to do that, its downstream aluminum industry will become dependent on primary aluminum imports, according to the report. We also heard much of this discussion at the recent Harbor Aluminum event here in Chicago.
The report highlights China’s primary challenge to becoming self-sufficient from a primary aluminum standpoint – which involves securing supply of bauxite as opposed to alumina, in which it already has become largely self-sufficient. Indonesian bauxite export controls could send alumina and bauxite prices rising at the same time, forcing China to import primary aluminum and thus lending price support.
But that scenario is unlikely to occur, according to the study’s authors, meaning China will likely achieve self-sufficiency in primary aluminum production.
How This All Plays Out
The BCG report suggests actions that individual aluminum company CEOs must take, as well as actions the industry as a whole must take to improve the overall health of the industry. The primary recommendation at the industry level involves a “…collective action of the key industry players (including governments in critical markets) to align capacity rapidly and on a sufficient scale.” The report suggests the industry ought to identify an M&A leader, such as ArcelorMittal in the steel industry, and remove outdated and costly capacity.
The report also suggests government and regulatory intervention to minimize legal constraints to allow for capacity reduction across companies. Other recommendations include helping China remove high-cost capacity, and instead, make investments globally as Japan has done.
At an individual company level, the report makes a number of recommendations, including “capturing new opportunities upstream and downstream along the value chain,” a full range of cost reduction initiatives such as improving energy efficiency, procurement – specifically contract negotiation for consumables and services, repair and maintenance, inventory management, logistics and overhead costs.
Without industry-wide structural changes, the world will remain awash with excess aluminum. And we all know what too much supply means…