A lot has been said and written about the once mighty U.S. aluminium industry and how it has been hit badly by the recent spate of Chinese aluminium extrusions export. But it is not the only factor that has been driving the U.S. market down to economical non-viability; there is more to it.
Here is why:
The recent data published by the United States Geological Survey in its 2014 Minerals Yearbook shows the symptoms of a near to middle term slowdown were pretty evident during the end of 2014.
Total aluminium production in the country during 2014 decreased while consumption increased by 12% compared with that of 2013. Domestic primary aluminium smelters produced 1.71 million metric tons (mt) of aluminium valued at $3.94 billion, 12% less than the quantity and 3% less than the value in 2013.
At yearend, eight primary aluminium smelters owned by three companies were operating, and three additional smelters were temporarily idle. Of these three idled smelters, one was permanently shut down after bankruptcy filing failed to find a buyer, according to the report. About 28% of the domestic primary aluminium smelting capacity, including idle potlines at the operating smelters were idled at the yearend.
This was the scenario when aluminium prices on London Metal Exchange (LME) was $0.846 per pound- slightly higher than that in 2013. Global inventory levels were still at a surplus as production from smelters across the world outpaced shutdown of facilities; and the 2014 annual average market price of primary aluminium ingot was at around $1.045 per pound, 11% higher from that in 2013. This buoyancy was further supported by a higher price premium that averaged 24% in 2014, compared with a much lower 13% in2013.
Clearly, there was little reason for the primary aluminium makers to complain as they were all making decent profits.
But, the growing aluminium oversupply in the world as well as in U.S. regional market and escalation of production cost due to high power tariffs and inadequate supply of bauxite were indicative enough of a difficult market situation that was slowly brewing and started unfolding as soon as the New Year began.
Cut to 2015:
The not-so-benign oversupply of the metal which finds wide application in packaging, transportation, electrical, and construction sectors, soon grew into an uncontrollable glut, courtesy Chinese overproduction and continuous dumping of their products on to the world markets. As a result, market shares of the major industry players in their respective domestic markets started shrinking before they could even take guard against the situation (spell it, strategic diversification into downstream business verticals).
Big names such as Alcoa, Glencore controlled Century Aluminium, and Vedanta started making significant losses, and they were either forced to shut down their facilities or take resort to deep cost-cutting initiatives.
Of the eight aluminium smelters operating in the U.S. today, half — including Century Aluminium’s Mount Holly site — have announced plans to close by year’s end, taking about 3,000 jobs with them. Three of the remaining four smelters have curtailed production by as much as two-thirds. Only Alcoa’s smelter in Evansville, Ind., continues to operate normally.
The Aluminum Association, the leading voice for aluminium industry in Washington, DC has come forward to voice the plight of the smelter owners against the Chinese aluminium onslaught.
Heidi Biggs Brock, President & CEO, The Aluminum Association told AlCircle in a recent interview: “This is not simply free trade at work. In addition to the non-market incentives from the Chinese government, there is also mounting evidence that certain producers in China are unlawfully using the system to further distort the market. These unfair practices violate Chinese law and putting jobs at risk here at home.”
Century Aluminum has joined other U.S. aluminium producers and industry advocates in lobbying the federal government to put a stop to what it terms as unfair competition from cheap Chinese imports.
But is China the only factor responsible?
The answer is “No.” The dismal price scenario prevailing in the global aluminium industry right now is the result of a mix of factors, demand-supply dynamics being just one of them.
Satish Pai, chief executive officer (aluminium), Hindalco Industries, in recent interview with the Business Standard, said: “Today, demand and supply alone do not determine pricing and financial institutions play a huge role.”
He explained, decline in aluminium prices, is not a one-off case. It is there across all commodities ranging from crude, iron ore, steel, copper, and zinc, aluminium is no exception.
The decline, he said is “primarily on account of depressed sentiments and risk averseness that has led to the strengthening of the dollar in the recent past. As a result, money is moving out of commodities as an asset class into a perceived safe heaven (dollar). This has led to a sharp plunge in London Metal Exchange (LME) prices.”
“The reasons for falling prices are fears of the Chinese economy slowing down, perceived threat of hard landing, looming threat of the US Federal Reserve (Fed) increasing interest rates, general pessimism about global macro-economy with many parts not doing well, especially emerging economies.”
Premium is another significant component to pricing along with LME price, in case of aluminium. Citing the recent crash of premiums from above $400 levels to $100 levels, Mr. Pai said, “This is hurting aluminium producers.” He attributed this decline to the pessimistic sentiments, change in LME warehousing rules and other factors that made financing trade of aluminium unviable, which resulted in release of inventory locked up, easing the availability of physical aluminium. So, the premium which was reflective of scarcity in the particular geography declined sharply.
All these factors combined together have rendered most U.S. aluminium smelters non-operational.
So, one thing is clear, the downfall that is evident today is basically the result of marketing myopia that the U.S. aluminium industry has failed to overcome over the last one year. Had they been more responsive to changes and taken proactive measures to diversify into downstream verticals well ahead in time, things would not have worsened so fast.
However, demand remaining strong, prices are bound to recover- sooner than later. Premium already appears to have bottomed out; they are increasing. Now, once China cuts down on its subsidies to smelters and exporters, which they will, given the rising cost of production fuelled by over-reliance on imported bauxite, supply will also peak out.