Smeltdown or bright future?

Jaivime Evaristo.

By Jaivime Evaristo

The price of primary aluminium, which has plummeted from a London Metal Exchange (LME) cash price of US $3,220/mt in July 2008 to US $1,447/mt as of April 6, results from a confluence of three factors: a freefall in demand, rising stock levels, and a bit of ‘bearish speculation’. At least, that’s what I’d like to call it at this point, in order to put emphasis on the first two more measurable variables.

With around 75% of global production operating at cash costs above the current price levels, production curtailments are a logical move that not only help stabilise LME stocks - which recently hit record highs of above 3.45 million tonnes - but also save producers’ medium to long-term interests before running out of cash.

As of the first quarter of 2009, curtailments hit almost 6 million tonnes per year, with China accounting for over 50%, according to Macquarie Research.

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Conversely, in the GCC, around 1.3 million tonnes of capacity are coming on line in the next 24 months, as two green field projects - Qatar Aluminium (Qatalum) and Emirates Aluminium (Emal) - become fully operational.

Before you label this more rhetorical defiance to the ‘negative growth’ seen in the commodities market, first consider sensibly proving the pragmatic side of primary aluminium production in the GCC.

Despite the downturn, Middle East production outlook is solid, especially for Gulf aluminium smelters. The competitive advantages are quite obvious: low energy and labour costs, and economies of scale.

The caveat behind the luxury of these pleasant realities, however, remains to be the Gulf producers’ ability to manage cost pressures, which are expected to linger for quite some time.

Improving productivity and reducing energy consumption and wastage could prove to be the day-to-day challenges for existing smelters - Dubal, Alba, Sohar. While the importance of achieving cost efficiency from day one stands as the primary target for green field start-ups, Qatalum and Emal.

Lastly, and perhaps more proactively, as labour and construction costs continue to drop, prudent use of capex on these two upcoming smelters could lock in savings, to improve cash position, even before production of the first hot metal takes place.  

Jaivime Evaristo is a consultant with the Contax Group.

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