It is a possibility, both in the US and in Europe as domestic producers are either on razor-thin margins or facing losses as Chinese exports rise relentlessly.
A Reuters article this week points the finger for closure at some of the West’s highest-cost smelters. Not surprisingly, all are in Europe. The article mentions two of Alcoa’s in Spain, Klesch Group’s Dutch Delfiz plant and Trimet’s German plant at Essen. But Glencore has closed Century Aluminum’s 244,000-metric-tons Hawkesville smelter in Kentucky and both Alcoa and UC Rusal are looking at further closures so Europe’s higher cost base is not alone.
Yet, while Western producers are making minor reductions here and there, China is adding more capacity in a single plant than most countries in the West are closing. That, in itself, would be manageable if at the same time the country closed its older, more expensive and less efficient plants, but it isn’t.
High-Cost Smelters Staying Open
Reuters observes (and we have no way to verify this so we’ll take it at face value) that of the world’s 50 highest-cost smelters, 37 are in China where the average cost of production is said to be $1,918 per mt, yet the London Metal Exchange is in the low $1,600s and, even with the physical delivery premium, smelters cannot realize more than $1,750 ex-factory gate.
It would appear they have grounds for asking how does China export semi-finished products based on such a high primary cost and still make money? If they don’t make money then there are clear grounds for anti-dumping litigation.
Reuters cites Wood Mackenzie data suggesting fully 10% of smelters outside of China are running in the red at or around current prices. We suspect that to be, maybe, more than 10%, but, that aside, you have to ask how long these operators are going to put up with a prolongation of this situation while the architects of their predicament are arguably selling metal at a loss, propped up with regional or state support?
What Has Changed in China?
It would not be fair to say China hasn’t undergone some rationalization among its primary producers. The article suggests 1.5 million metric tons of annualized production has been closed between January and August of this year. In itself, that is a sizable chunk of production, the problem is that new capacity is being added at such a rate that the closures are not doing more than slowing the rate of expansion.
Big Aluminum could go the way of Big Steel and start lobbying Washington for action. In an unregulated energy market, like the US has, there is a limit to how much a producer can move themselves down the cost curve simply by efficiency improvements.
The state can’t step in and offer subsidized power. Producers are almost forced to lobby for anti-dumping protection in order to survive, and while consumers may welcome the short-term gain of low metal prices, in the long run a healthy domestic primary production industry is of more benefit than accepting widespread closures and being at the mercy of the international supply market when that market tightens.