COLUMN-Global aluminium output on the move: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters)

By Andy Home

LONDON, Jan 20 (Reuters) - Global aluminium output rose again last year. By exactly how much we won't know until China publishes its December data.

China is now the single most important driver of rising world production, national output jumping by an annualised 3.03 million tonnes in the first 11 months of 2013.

Production in the rest of the world fell for the second consecutive year to 24.59 million tonnes in 2013, according to figures from the International Aluminium Institute (IAI). That's a reflection of the growing list of smelter closures due to low prices.

Last year's drop was marginal at just 1.1 percent, or 268,000 tonnes, which may seem surprising given that announced closures over the last 12 months have totalled around 1.25 million tonnes.

But the year-on-year comparison with 2012 is distorted by the return of two major plants, Alma in Canada and Hillside in South Africa, from a protracted strike and technical problems respectively in 2012.

Moreover, while older plants shut up shop just about everywhere else, smelter capacity in the Persian Gulf continues to expand.

This migration of smelter capacity, a long-running, slow-moving process, has been largely forgotten in the fractious industry debate on rising physical aluminium premiums.

And while it does not in itself shed much light on why premiums have just rocketed to historic highs, it will in all likelihood explain why premiums will not return to historic norms.

******************************************************* Graphic on regional aluminium output in 2013: http://link.reuters.com/raq26v Graphic on long-term output trends: http://link.reuters.com/qaq26v Graphic on Platts U.S. and European premium assessments: http://link.reuters.com/zyw95v *******************************************************

RETREATING...

Aluminium production in much of the world outside of China is in long-term structural decline.

In Western Europe output last year totalled 3.53 million tonnes, the lowest outturn since the 1990s.

Daily average output in December itself was 9,550 tonnes. That's lower than the 9,740 tonnes produced in October 2009, the trough of the weak production cycle resulting from the global financial crisis.

The downtrend, moreover, has further to run.

The bankruptcy and closure of the Delfzjil smelter in the Netherlands, for example, is too recent to have made it into the latest IAI figures.

Nor is there any shortage of potential further casualties, given the number of plants struggling to stay afloat.

The smelter sector in North America is also shrinking.

It's not obvious from the headline 1.2 percent increase in regional production last year, but that in large part reflected the return to full operations of the Alma smelter. Production at the plant jumped to 440,000 tonnes from 208,000 tonnes in 2012, when it was operating at one-third capacity during a protracted union dispute.

Daily North American output in December of 12,740 tonnes was the lowest monthly run rate since October 2010.

And although regional production is still (just) above the cycle lows of 2009, it may not be for long.

Alcoa (NYSE: AA - news) has just announced another 84,000 tonnes of capacity cuts at its Massena operations in the state of New York, to be phased in over the first part of 2014.

Rio Tinto (Xetra: 855018 - news) 's AP60 smelter, meanwhile, the only new addition to North American capacity, was ramped up to full 60,000-tonnes-per-year capacity by the end of last year, suggesting no further impact on the IAI figures.

...RETREATING...

As domestic capacity retreats, European and U.S. import requirements grow.

The United States has historically relied first and foremost on its northern neighbour for metal to fill the domestic supply gap. What Canada couldn't cover was once sourced from South America.

But there too production is in long-term decline, reflecting price-related closures in Brazil and the financial collapse of cash-starved Venezuelan plants.

Latin American production fell by 6.4 percent last year. It has fallen every year since 2008.

More recently, U.S. importers turned to Russia, already a key supplier to the European marketplace.

But local giant UC RUSAL last year finally bit the bullet and announced a string of capacity closures, some permanent.

December average daily production in the IAI's Eastern and Central Europe category was 10,190 tonnes, the lowest it has been since 2001.

...ADVANCING

Only in the Gulf is aluminium production growing as operators tap into the region's lower power costs, the single most important part of the light metal's cost profile.

Production grew by 6.1 percent last year and annualised output is running just below 4.0 million tonnes, meaning the region has overtaken Europe, both Western and Eastern, as the second-largest regional production hub after North America.

Indeed, the growth would have been more spectacular had it not been for commissioning problems at the Ma'aden smelter in Saudi Arabia.

It will continue to ramp up in 2014, albeit to a modified timetable. So too will the latest expansion of the EMAL smelter in Abu Dhabi.

SHIFTING GEOGRAPHY, SHIFTING PREMIUMS

This long-term migration of smelter capacity is simply a function of the search for better positioning on the production cost curve.

As energy, the single most important cost input to the smelting process, becomes more expensive in the old world, producers are shifting capacity to cheaper-energy locations, first and foremost the Gulf.

The same process is under way in China, where strong production growth is coming from a new generation of smelters leveraging stranded coal deposits in northwestern provinces such as Xinjiang.

Outside of China, though, this migration has implications for supply-deficit regions such as Western Europe and the United States.

The "marginal tonne" in the United States used to come from Brazil. Brazil, however, is no longer a net exporter and that "marginal tonne" is now coming from the Gulf.

Not only is the Gulf a lot further away but most of the Gulf producers are logistically geared to supplying the Asian market.

Freight costs are therefore higher and that must have an implication for U.S. physical market premiums, a point that has been largely forgotten in the heated debate about the impact on premiums of load-out queues at London Metal Exchange (LME) warehouses.

Industry analyst Lloyd O'Carroll recently suggested ("Aluminum Premiums - Our Updated View", Sept. 30, 2013) that the United States will need a premium in the 8-9 cents per lb ($175-200 per tonne) range to attract Gulf metal over the medium term.

Given that the U.S. Midwest premium has just gone on a super-charged rally to 20 cents per lb, that may all sound somewhat academic.

But remember, the current consensus is that premiums "should" (emphasis on that word) decline as new LME rules, aimed at reducing the warehouse queues, kick in from May.

It is, though, highly unlikely they will return to historic norms, because in the interim metal supply in the main premium markets of Europe and the United States has shrunk.

And it will shrink further. Just as Gulf capacity will grow further. (Editing by Dale Hudson)