COMMENT: LME rule changes turn words to action on capacity curtailments

The London Metal Exchange’s announcement of proposed changes to the warehouse load-out regulations has prompted substantial capacity cuts among aluminium producers that, in some cases, had previously been dragging their feet over those curtailments.

The London Metal Exchange’s announcement of proposed changes to the warehouse load-out regulations seems to have precipitated substantial capacity cuts among aluminium producers that, in some cases, had previously been dragging their feet over those curtailments.

Production cuts require money, large-scale layoffs of workers, and the renegotiation of power and raw material supply contracts.

When demand collapsed in 2009, producers sold metal into warehouses rather than cut operations – a move that led to the huge stock levels in LME warehouses, which have ultimately led to the exchange’s new load-out proposals.

When costs – particularly power costs – rose after the financial crash, aluminium prices did not, and today remain well below the marginal cost of production.

But still producers were reluctant to cut output, with many staying profitable solely because of the record-high premiums that are a result of the incentives paid by warehouse companies for deliveries in 2012 in particular.

All major producers have been vocal on the necessity of cuts, especially at higher-cost smelters in western markets. But closures have been a hard sell for governments that want large employers to stay in operation, and for the producers themselves, who see such strong demand forecasts over the coming years.

But premiums are falling now in both Europe and the USA. Without that extra revenue, and with prices still so low on the LME, a greater share of production is now loss-making and producers are responding.

United Co Rusal has been buying primary metal to cover supply shortfalls to customers, and has deferred a number of its own alumina purchases, as it plans to cut 300,000 tpy of capacity by the end of the year. Alcoa announced last week that it would add 164,000 of aluminium capacity in New York State to its shutdown plans, which call for 460,000 tpy of cuts over the next year.
 
Both companies have spoken about the need for cuts throughout the last two years, but they seem to have been spurred on in recent weeks to actually move on the problem.

Between May 2012 and May 2013, Rusal cut just 42,000 tpy of aluminium production capacity, despite saying in May 2012 that it would cut 600,000 tpy – later revised to 300,000 tpy.

Alcoa has closed its Portovesme and Fusina smelters in Italy, but it was a slow process. The company announced the Portovesme closure in January last year, but did not begin curtailing operations there until September following local government efforts to keep the facility open.

Such cuts , should they be replicated among the other major producers, could finally see aluminium prices rise out of the ranges in which they have wallowed since the financial crisis, and, with the lower premiums, may see the business of aluminium purchasing return to some semblance of normality in 2014.

Jethro Wookey
jwookey@metalbulletin.com
Twitter: @jethrowookey_mb

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