Global miner Rio Tinto's decision this week to close its Lynemouth aluminium smelter in Britain has highlighted the poor health of an industry pinched by lower metals prices and high costs.

We have been arguing for some time that aluminium prices are well into the cost curve and that eventually this will result in production cutbacks and closures, RBS analyst Nikos Kavalis said.

Citing data from consultancy Brook Hunt, the metals arm of Wood Mackenzie, he said current price levels made more than 40 percent of aluminium producers unprofitable.

Benchmark aluminium prices were around $2,111 on Friday, down almost 25 percent from $2,803 hit in March, its highest since August 2008.

As such, it comes as no surprise that a relatively high (and potentially rising) cost operation like Lynemouth is being closed, Kavalis added.

In October Rio Tinto, one of the world's top producers of aluminium, put up for sale an estimated $8 billion (5 billion pounds) worth of facilities, across six countries, including Lynemouth, only four years after buying aluminium giant Alcan.

The speed with which it has decided to close Lynemouth has raised some eyebrows, and suggests it may struggle to find buyers for the other operations. But it is fair to say that the plant in northeast England had been under review for some time.

The decision to sell the selected assets in the first place is a clear sign of the rising costs facing this industry as the company chose to focus on its lower cost hydro-powered plants in Canada.

The fact that they (Rio) decided to sell aluminium assets is reflecting recent cost pressures in the industry...It's becoming more difficult for companies to produce aluminium profitably, said Standard Chartered analyst Daniel Smith.

Power costs --accounting for 30 to 50 percent of the cost to produce aluminium -- are high, while at the same time weaker prices and slowing demand have squeezed companies' margins.

An inability to secure long-term cheap power recently prompted U.S. aluminium major Alcoa's decision to abandon long-held plans to build a new smelter in Iceland, citing an inability to secure long-term cheap power.


It is no coincidence that the other Rio Tinto smelters on the block are in regions where costs are high and will likely rise further.

The Australian Aluminium Council (AAC), for example, said the country's new carbon pricing plan would prompt a contraction in the country's aluminium industry.

The assets to be divested are old smelters - hardly top-tier assets. I also wonder how this decision was affected by talk of a carbon tax in Australia, said an Australia-based consultant.

Over the next decade aluminium production costs there could rise to more than $200 per tonne, while in top producer China it was not expected to get any higher than $60, an AAC executive said.

Many industry experts are scratching their heads as to who would be interested in these mainly high-cost, ageing operations in areas where costs are set to rise further at a time when global demand worries dominate.

But it does not follow that any of the other operations on the block will close. The most likely to be singled out would be the Sebree smelter in Kentucky, although closure is not certain.

I do not believe that one can infer from the announcement of Lynemouth's impending closure, that Sebree will be closed as well, said Olivier Masson, a senior consultant at CRU Group.

However, drumming up interest for any of the assets may prove to be drawn out, particularly in the current economic climate.

Firms in China, which already accounts for 40 percent of global output, do not seem interested.

At this time of financial uncertainty which banks would be willing to lend for the buying of these assets?, a trader in China, familiar with Rio Tinto's operations, said.

China, the world's top aluminium producer and consumer, also has abundant smelting capacity. The country's production of primary aluminium hit a record of 1.591 million tonnes in June.

In addition those assets are not cheap and are not too profitable, said one Chinese smelter executive.

The uncertain global economic situation has weakened aluminium's outlook and if the situation worsens over the next two years, demand is likely to be severely affected.

Perhaps Rio's move indicates caution towards the future prospect of the metal, CITIC Newedge Futures trader Liang Haisan said recently.

(Additional reporting by Polly Yam and Carrie Ho; editing by Keiron Henderson)

(This story was corrected in the second paragraph to remove a reference to marginal cost of production)