The Bitter End? The Rise and Demise of the South American Aluminum Industry

Along with steel, aluminum was once one of South America’s major growth products and the source of considerable pride for several Latin American countries.

Rapid Decline

But for a variety of reasons, the decline in aluminum output has been rapid and dramatic. A recent Reuters article states that according to International Aluminum Institute numbers, February’s regional run-rate was the equivalent to 1.33 million metric tons per year. A year ago it was 1.80 million. At its peak in 2008, it was 2.70 million tons. South America was once a major exporter of metal to world markets.

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In 1994 Brazil was the third-largest and Venezuela the fourth-largest source of aluminum imports into the United States. Now, both countries import. We recently wrote about the state of the Venezuelan aluminum sector. Chronic underinvestment due to the gradual bankrupting of the once-buoyant Venezuelan economy has left the country’s two smelters a shadow of their former selves.

Venalum had a nominal capacity of 430,000 mt per year but production last year declined to just 110,000 mt and the company has warned customers it can’t even meet internationally expected purity norms for standard P1020 grade. Alcasa, the other plant with a headline capacity of 170,000 mt, is only producing about 29,000 mt.

Woe is Brazil

Brazil’s decline is even more tragic.

Technically, the country’s smelters are perfectly capable of operating at capacity but high costs have seen the industry decimated in recent years. Alcoa curtailed two pot-lines at the 440,000-mt-per-year plant over the course of 2013 and 2014, according to Reuters, and now the third and last will also be mothballed. It’s the fifth, and largest, Brazilian smelter to be shuttered since 2009 following on the heels of the company’s Pocos de Caldas smelter, which had been operating since 1970, becoming fully shuttered in May of last year.

The Valesul smelter was closed in 2009, while Novelis closed its Aratu plant in 2010 and its Ouro Preto plant in 2014, the paper reports.

What’s Left

There are now only two primary smelters left operating in Brazil: Norsk Hydro‘s 460,000-mt-per-year Albras and CBA‘s 475,000- mt-per-year Sorocaba. National production has fallen from a peak of 1.67 million mt in 2007 to 962,000 mt in 2014, a figure that is now set to fall further with the closure of Alumar.

The reasons are two-fold: first, cost and second lack of power as the country has experienced a prolonged period of drought resulting in falling power output from the once-seemingly limitless hydro-electric facilities.

How bad is it? The power situation is so bad, Brazil will have to import power from Argentina and Uruguay this year. On the cost side, power and raw materials have become so expensive smelters cannot even compete with the benefit of the world’s largest physical delivery premium. According to Platts the Brazilian delivery premium is $590 per mt over the London Metal Exchange, way higher than Japan, Europe or the USA and  the premium is remaining stubbornly high as premiums elsewhere begin to ease.

On the back of rapidly rising domestic smelting capacity and a growing economy, Brazil invested in considerable downstream processing capacity that is now having to compete for imports of primary metal in order to keep functioning. Not surprisingly, those same processors are finding it nigh-impossible to compete in international markets, a dramatic and rather tragic turnaround from the last decade when South America’s aluminum industry held out so much promise.

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