Guess Who's Driving Aluminum Production?

Perhaps of more consequence than aluminum financing deals, as we mentioned in Part One, is the structural shift in the supply side that has taken place.

As the FT points out, where copper and iron ore have been driven by a surge in Chinese demand, aluminum has been driven by a surge in Chinese production. A surge that many expected would be short-lived due to China’s relatively high power costs, but in practice has continued to grow.

Production Numbers
In 2000 China produced 2.8 million tons; last year it produced 17.8 million tons with a capacity of well over 20 million tons. In the first eight months of this year, its output was 10.2% higher than in the same period a year earlier, according to the IAI figures in the FT; in the rest of the world, output was 2.1% lower.

Not only is China moving production westward in search of lower-cost electricity, but it is also moving up the technology ladder, according to the FT. Chinese smelters can now run electricity through their pots at 500,000 amps, while Rusal’s newest smelters manage only 300,000, lowering costs and increasing efficiency.

Price Stability
Encouragingly for aluminum consumers, new applications for the metal are being found everyday and the market continues to expand strongly while supply in the medium-to-longer term appears plentiful enough to ensure prices remain roughly around current levels, rather than having any prospect of returning to the $3000+ per ton highs of mid-2008.

Back to the producers, though -- with smelter profits under so much pressure at current prices, it is no surprise Rio Tinto Alcan is focusing more on alumina production and looking to sell its smelting business, while BHP Billiton boss Marius Kloppers says, “I don’t like aluminium,” and has no plans to invest any money in its aluminum business.