COLUMN-Is the aluminium production cycle starting to turn?: Andy Home

By Andy Home

LONDON, Nov 20 (Reuters) - Daily average aluminium production in the world outside China slid to 66,200 tonnes in October, according to the International Aluminium Institute (IAI).

It was the lowest collective run-rate since January with continued strong growth in the Gulf region, up 23 percent so far this year, offset by curtailments and closures elsewhere.

Annualised non-Chinese production has fallen by 1.61 million tonnes since the start of 2012, which was when Western producers started wielding the collective axe in response to low prices.

However, the prospects for further falls in output are diminishing.

The cutback impetus is fading just about everywhere outside South America, while news that one European smelter, the Aldel plant in the Netherlands, is planning a restart may be a harbinger of a major turning point.

FADING IMPETUS

Aluminium production is still trending lower in only one region, South America.

This largely reflects the continued contraction of production in Brazil, a country that has been particularly hard hit by the combination of high power and low aluminium prices.

Indeed, the last announced price-related cutback anywhere in the world was that of the small Ouro Preto smelter operated by Novelis.

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In western Europe production has been broadly stable over the course of 2014 with the last significant curtailments taking place in 2013.

October's production of 301,000 tonnes represented only a marginal 0.3-percent year-on-year decline.

In eastern Europe Rusal's curtailments and closures of outdated capacity, amounting to around 600,000 tonnes of annualised production, were completed in the first quarter of this year and run-rates have since stabilised.

October's output of 321,000 tonnes was actually up by 1.6 percent on the year.

NON-PRICE RELATED CUTS IN NORTH AMERICA

Among the major producing regions only in North America is output still running below last year's level with annualised production dropping to a fresh cycle low of 4.46 million tonnes in October.

However, that reflects two cutbacks which have nothing to do with price.

Alcoa (NYSE: AA - news) 's Warrick smelter in Indiana lost one of five lines due to a fire at the start of last month. The affected capacity, around 54,000 tonnes, will only be back online around the middle of December.

In Canada, Rio Tinto (Xetra: 855018 - news) 's Kitimat smelter has been winding down its older Soederberg-technology potlines prior to firing up newer, expanded capacity next year.

Production at the plant fell to 28,000 tonnes in Q3 from 35,000 tonnes in Q2 and it will dip further in Q4 with the closure in September of another potline.

However, the trend will reverse early next year as Kitimat ramps up to its new 420,000-tonne per year capacity.

CHANGE OF TREND

And that may be symptomatic of the broader trend in non-Chinese production.

With cutbacks having largely run their course, there seems little potential for any further significant downside.

Indeed, the market's attention is now starting to turn to the possibility of restarts, particularly in light of the planned resurrection of the Aldel smelter.

With capacity of around 170,000 tonnes and owned by the Klesch Group, Aldel closed and applied for bankruptcy at the start of this year.

It is now planning to restart at a rate of 100,000-tonnes per year early next year. The specific trigger is a proposed deal to connect the plant with the German electricity grid, which would allow it to access cheaper power, a key cost input for every aluminium smelter.

But the broader context behind this restart is the rise in aluminium price to the point that even the most hard-pressed smelters are now able to generate a positive return.

Not the "basis" price of aluminium on the London Metal Exchange (LME), which, currently hovering just above $2,000 per tonne, has risen by only a modest 12 percent so far this year.

But the "all-in" price, comprising both LME and physical premiums, which has risen further and faster.

With premiums on a roll this year and now trading above $500 per tonne on both sides of the Atlantic, the "all-in" price achievable for a smelter is above $2,500 per tonne.

Aldel's proposed revival is proof that even the most cost-challenged smelters can make a margin at that sort of price level.

A LOGICAL REACTION?

There seems little immediate prospect of sector leaders such as Alcoa and Rusal (HKSE: 0486-OL.HK - news) reactivating capacity in a major way.

But there is plenty of scope for smaller smelters to follow in Aldel's footsteps or for those with idled capacity to start quietly tweaking run-rates higher.

And, in theory, this would be a logical reaction to the strength of the "all-in" price, given part of the rise in premiums is down to deepening supply-demand deficits in the U.S. and Europe.

In practice, however, there is the not-so-little problem of all the legacy stock, which continues to weigh heavy on the LME price and which may, counter intuitively, be one reason for elevated premiums.

The aluminium market really needs to continue generating supply deficits for several years if stocks are to be brought back down to anything that might be deemed a "normal" level.

That will require continued producer discipline.

The Aldel restart in itself doesn't mark a major break of producer ranks, but it may be a sign that the non-Chinese production cycle is about to turn. (Editing by David Evans)