Pessimism reigns in aluminum market

By Leia Michele Toovey- Exclusive to Aluminum Investing News

Aluminum prices are near a five-year low as orders from automakers, builders and appliance manufacturers have dropped.

The global recession, collapsing consumer and corporate confidence and plunging demand for industrial metals have combined to drop the aluminum prices on the LME to their lowest monthly rate since April 2003. Aluminum inventories are rising and could depress prices even further unless producers shut more capacity to wipe out the growing surplus.

The tonnage in LME warehouses last week was 2.67 million metric tonnes, which set a new record above the 2.66 million reported in June 1994. Since cutbacks began last August, some analysts’ tallies show about 5.8 million metric tonnes of annual capacity has been curtailed globally. Analysts predict LME inventories are heading for 3 million metric tonnes by the end of this year. At the current rate of consumption, that would bring the global surplus to 1.9 million metric tonnes this year, up from an estimated 1.16 million in 2008.

Oleg Deripaska is pessimistic about the aluminum market’s future. As the biggest shareholder of the world’s largest aluminum producer, United Co. Rusal, he predicts aluminum will average $1,600 per tonne in the next seven years, compared with a current level of $1,349. Rusal Chairman Viktor Vekselberg, in contrast, has said he is 100 per cent sure the price will climb to $2,000 a tonne this year.

Deripaska voiced his pessimistic view at the World Economic Conference, saying, “What’s important at the moment for the metals and mining industry is to really stop hoping and prepare for the worst.  Global demand for aluminum will fall by almost a quarter, to 28 million tonnes this year, from about 36.5 million tonnes in 2008, said Deripaska.”There is enormous oversupply. There will be shut downs, and companies will have to make decisions about what capacity should be cut. In my view, there will be fewer countries in the world producing the metal. More metals will be sold under long-term contracts, and less on the spot market.” 

Company news

Rio Tinto Group, the world’s third-largest mining company, is in talks  with its biggest shareholder Aluminum Corp of China to raise cash. Aluminum Corp, known as Chinalco, may buy convertible debt in Rio Tinto and or minority stakes in some of its units, which may raise as much as $15 billion for struggling Rio Tinto. After commodity prices plunged the most in more than 50 years in 2008 the company’s debt ballooned 19-fold with the purchase of Alcan Inc. Chinalco’s Vice-president Lu Youging confirmed that they are in  initial talks to buy assets from Rio, however he added that there is no certainty of an agreement with Rio because Rio is also talking to other people. “Any agreement would need government approval and depends on prices,” he said. Chinalco may want to buy stakes in Rio’s Gove or Queensland Alumina operations in Australia, the Escondida copper mine in Chile, or it may also be interested in Rio’s iron ore unit. Strategically, the purchase of Rio assets will benefit Chinalco as China is lacking supply of these materials and demand will be sustainable.

Aluminum products maker Kaiser Aluminum Corp. said Thursday it expects a net loss in the fourth quarter and in 2008 due to a slew of pretax charges totaling about $185 million. About $135 million of the charges is mainly related to a decline in metal prices. Other items include restructuring charges related to the closing of Kaiser’s Tulsa, Okla., plant as well as cuts at its Bellwood, Va., facility, the company said.

United Company Rusal may sell shares in a private placement as it seeks to refinance about $16.3 billion of debt, according to Chairman Viktor Vekselberg.  The company owes $7 billion to foreign banks, about $6.5 billion to domestic lenders and about $2.8 billion to Mikhail Prokhorov’s Onexim Group. Rusal is in “active” talks with creditors and may agree on a refinancing of bank loans within three months. Vekselberg said RusAl would cut output by as much as 10 per cent and freeze investment for about three years. Oleg Deripaska, the company’s majority owner, returned as Rusal’s Chief Executive Officer earlier this year. Aluminum must trade at $1,700 per tonne for Rusal to service its debt and pursue new projects.

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