A story about aluminum and the stagnant global economy

They call it “the aluminum smelter at the end of the world”.

Located in the southernmost point of New Zealand on Tiwai Point Island, the plant produces 340,000 tonnes per year of low carbon aluminum and employs about 1,000 people.

But his future is in doubt. Owner Rio Tinto said last month it could close the plant or cut production unless it receives a cheaper deal from its energy provider Meridian Energy.

The plant consumes about 12% of all New Zealand’s electricity and is indicative of the situation in which manufacturers are – low prices and low demand. “I haven’t seen such harsh conditions in a long time,” says Jean – Sebastien Jacques, CEO of Rio. “Indeed, the situation is, to put it mildly, critical.”

He did not exaggerate. Since the price reached $ 2500 per tonne in April 2018, LME prices have begun to fall gradually. Currently, the metal is trading at $ 1,794 per tonne. The CRU consultancy estimates that in Q4, manufacturers will lose even more of their production capabilities. Opportunities for 4.4 million tonnes of aluminum or production will decrease by 7%.

The demand for aluminum, which is used in almost everything from cars to planes and canoes, has suffered a major blow from the stagnant automotive industry worldwide. The only ray of light is in the packaging industry. Consumers are increasingly using aluminum boutiques instead of plastic ones, which can be recycled much more optimally.

CRU is expecting demand to fall 0.4% this year, the first contraction in 10 years. Consumption should go up again in 2020, but so will supply. Production in China is expected to jump by 7.1% next year and the rest of the world by 2.4%. CRUs expect metal prices to go up to $ 1,700 or even lower. Especially if the world economy goes into recession. China may ban exports of pure aluminum, but manufacturers could export semi-fabricated forms of metal.

“Something has to give impetus to this market because it will soon be oversaturated.” says Vivienne Lloyd, an analyst at Macquarie. “Production must be reduced somewhere.”

But where? It remains to be seen whether Rio or Alcoa are really serious about limiting production.

“It is often the case that companies declare publicly that they have problems, hoping that governments will help them drive prices up. We have to remember that combines are one of the biggest customers of power companies.” says Lloyd.

The fact that Rio is in talks with Meridian and the government “to find a way out of the situation” means that closing down Tiwai Point is the last option. Lower aluminum prices may occur to elicit the anticipated response from the market and governments.

Source: Financial Times


 Trader Martin Nikolov

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