The crisis in the global aluminium sector may have scored another reprieve on Tuesday, when major miner Rio Tinto announced significant cutbacks and curtailments in its alumina (aluminium oxide) division, given that current demand for aluminium remained poor.
During the co-called commodities supercycle from early 2002 to mid-2008, aluminium producers benefited the least on the pricing front, at least among industrial metals. Aluminium is currently at multi year lows, more so than any other base metal, around USD 0.65/lb, with graphs of any kind showing a relentless trend of down, down, down.
Copper, the other key industrial metal has, by contrast, rallied from multi year lows of USD 1.28/lb in December, after collapsing from all time records around USD 4.08 in mid-2008. The price broke through USD 2.00/lb in the past few days.
Rio Tinto Alcan Bauxite and Alumina president Steve Hodgson was quoted as saying that despite major industry wide production cutbacks, aluminium stocks continue to increase. Even with alumina industry capacity cuts equivalent to 21m tonnes per year since the beginning of the crisis, including cuts of 12m tonnes made since January, there is still little improvement in the alumina price. At current prices around 70% of the industry is currently operating at a financial loss.
Alumina is refined, typically from mined bauxite, and is then smelted into primary aluminium, a process that uses huge amounts of electricity. Two tonnes of alumina smelts into roughly one tonne of aluminium.
In a report published on 5 March, RBC Capital Markets commented that the aluminium and nickel industries remain under the most pressure with spot prices sitting at the 25th and 65th percentiles of our estimated 2009 cash cost curves, respectively. The position of current aluminium and nickel prices relative to the cost curves is not sustainable. Either additional production cuts will be made to balance the markets resulting in a rebound in price, or industry costs will continue to fall shifting the curves downwards and ultimately lowering price support levels.RBCCM remarked that the key outlier remains copper. The copper price has yet to drop below the 95th percentile of the cash cost curve, and at current levels all but a few of the highest cost producers in the world continue to generate positive cash flow. Copper was then around USD 1.60/lb.
The dynamics at work in the global aluminium sector are awful. The sector is associated with some of the world's biggest mining debts. Russia's unlisted UC Rusal, which openly claims to the dubious distinction of ranking as the world's biggest aluminium and alumina producer, in February announced that it had won a standstill reprieve on just over half of its USD 14bn in debt.Debt-soaked Alcoa was forced to stage a huge and heavily dilutive USD 1.1bn capital raising exercise during March, while Rio Tinto, sitting on massive net debt of USD 38.17bn on 31 December 2008, has been selling off choice assets and is also controversially involved in attempting to raise USD 12.3bn from smaller rival Chinalco by selling equity stakes in some of it's most prized assets. It also wants to sell convertibles worth USD 7.2bn to Chinalco. During 2007, Rio Tinto famously bought Alcan for USD 38bn in hard cash.BHP Billiton, one of the world's lowest cost aluminium producers, showed in a frank and convincing presentation how China has become the world's biggest country producer of aluminium (by far) over the past five years. The dynamics there include low capital construction costs, the ability to bring new power stations on stream on time, and strong domestic demand. Given that China's focus is on self-sufficiency in aluminium, along with China's growing requirement to import alumina or bauxite to meet domestic metal demands, one of BHP Billiton's key messages is that its growth options and project pipeline are aligned to this view, viz., to feed the emerging seaborne bauxite/alumina market.For companies with less enlightened views, the ongoing consequences of the crisis in aluminium could be dire, as seen in a number of stock prices. In less than 12 months, Century Aluminium has surrendered 96% of its market value, falling from nearly USD 6bn to just USD 252m currently. Vimetco's stock price is off 98%; Alcoa, which ranked as the biggest global mining stock by value less than five years ago, sits with a stock price 82% below highs seen during 2008. Today, Alcoa ranks as 93rd in the list of top 100 global mining stocks, measured by value.Listed specialist aluminium stocks that have held up best - relatively - tend to be those from China, or nearby, such as Yunnan Aluminium, Shanxi Guanlu, Henan Shenhuo, Chinalco, and Madras Aluminium.
Selected aluminium & related stocks
Source: market data; table compiled by Barry Sergeant