Aluminum demand has remained remarkably robust over the last couple of years and the market is eagerly awaiting Alcoa’s quarterly update later today to see how sales have fared recently, not to mention the firm’s expectations for the rest of the year. The US market has been well supplied with ingot and although large quantities of primary metal have flowed directly from smelter into LME warehouse (particularly in Detroit), the US Midwest Ingot price has not been pricing in unholy physical premiums in the way European and Japanese destinations have at times.
Speculation has been raised as to whether the relatively healthy state of US aluminum demand and comparatively modest declines (20%) in the metal price relative to others like copper (30%) may encourage more US smelter capacity to come back on-stream. A recent Standard Bank note to investors suggested the US may need additional capacity as imports from Latin America, particularly Brazil, fall. Although the average cost of production in Brazil is one of the world’s lowest, according to Harbor Aluminum’s Jorge Vazquez, smaller non-hydro plants are still being closed and production is being hit. Latin America’s aluminum surplus fell from 1.2 million metric tons in 2009 to half that in 2010 and dropped by about another 50 percent to 355,000 metric tons in 2011, Vazquez is quoted as saying to Platts last month.
(Electrical) Power Play
Comparing the cost of electricity suggests a strong case for re-starting US capacity, according to Vazquez. North American electricity prices are said to be comparable with many other aluminum producing regions. The average cash cost to produce aluminum in North America is $1,900/metric ton, while in Western Europe it’s $2,048 and in China it is $2,594. Latin America has a low cost of $1,624, but its cheap energy prices were locked in “a long time ago” at $22/MWh and energy there today costs $149/MWh. Of the idled US smelters potentially able to come back on-stream, only Alcoa’s Tennessee plant has a cash cost estimated at $2,087/metric ton to be below the current LME price, and as Brazilian producers are finding, when cheap deals expire, the economics of production can change fast. As attractive as rates are in the US today, no producer is going to switch back on without a longer-term fixed power price deal.
Aluminum Market Outlook
Jorge Vazquez predicts a 500,000-ton global supply deficit this year, but not all analysts agree. Lloyd O’Carroll, senior vice president and equity analyst at Davenport & Co., sees a surplus of around 900,000 tons, according to the Platts article, while Paul Williams of CRU forecast that the world primary aluminum market will remain in a surplus of close to 800,000 tons this year. Even if we avoid a recession, Williams sees that surplus rising to more than 1 million tons in 2012, weighing against the chances of more US capacity being re-started. Looking at the current LME price, though, and the cost of production in China, one has to ask: how much Chinese production growth are we going to see when smelters are probably losing money over there? Jorge Vazquez may have a point.
Rarely have Alcoa’s quarterly statements been so eagerly awaited; we’ll be sure to update you on the details later this week.