INTERVIEW: Aluminium market will be recognized for being ‘highly integrated, inter-dependent’ – Alf Barrios

Rio Tinto Aluminium chief executive Alf Barrios recounts a career that has included work at Cern, the European Commission and a long and loyal period at BP before he took up his present role during interesting times for the aluminium industry.

To say that change is a common theme in the life of Alf Barrios is something of an understatement.

He is a physicist and economist, worked for the European Commission, and spent more than two decades in the oil industry. He has also moved cities 17 times in his life. Now he is running one of the world’s largest aluminium businesses.

Barrios, who was born in New York to Spanish parents and has already lived in eight countries and 12 cities during his 52-year life, says it is difficult to answer where he is from. “I change city every three years on average. Many years ago my wife and I decided that wherever we lay our hats, that was our home. We realized at the beginning that if you live with a sense of only being somewhere on a temporary basis that you actually never settle down, and make the most of it,” he tells Metal Market Magazine.

His present home is Montreal, Canada, headquarters of Rio Tinto Aluminium, where Barrios moved in 2014 to assume his new role. “When I joined Rio Tinto I changed company, industry and country. Change has been a constant of my life,” he says, which is something that has made him both culturally aware and highly adaptable.

“My leadership style changes depending on the circumstances, the people I’m dealing with, the challenges I’m facing,” he adds.

When he arrived at Rio Tinto Aluminium four years ago, perhaps Barrios’ biggest challenge was to help the business think differently about itself. “We were one of the great companies in the aluminium industry, but the world had changed and the landscape was different,” he says.

Rio Tinto had acquired Canadian aluminium business Alcan in 2007, paying an eye-watering $38.1 billion after a competitive bidding war involving US producer Alcoa and Brazil’s Vale. The timing was unfortunate; a few months later, the global financial crisis slashed demand in key aluminium-consuming industries like automotive and aerospace, weighing heavily on the price of the metal for the next several years.

Like its peers, Rio Tinto was forced into a multi-year period of cost-cutting and productivity improvements which saw it cut output and seek to sell non-core assets. The benefits of those efforts were being felt when Barrios arrived, but the Rio Tinto Aluminium business still needed further work.

Picking up the baton
He started by putting in place a new strategy dividing the business into three separate segments: bauxite, alumina and smelting.

“I arrived in June 2014, presented a new strategy to the board in September, presented externally to shareholders and analysts in December, and I’ve been implementing it since then. The focus was on quality returns for shareholders and having a business that is robust through the cycle,” Barrios says.

“We focused on saying: what is the competitive advantage that we have in bauxite, or alumina or aluminium, where do we see the market going and how do we play into that so we can have tier one assets and deliver the strongest performance, not forgetting about growth but really focusing on value generation,” he adds.

It worked. Last year was the best ever for Rio Tinto Aluminium since the Alcan acquisition, with the business having the best year in safety, and the industry’s leading earnings before interest, taxes, depreciation and amortization (Ebitda) margin of 35%, up from 28% the prior year and 10 percentage points above the company’s closest rival. Its 2017 Ebidta was $3.42 billion, a 38% rise from 2016, while underlying earnings of $1.58 billion were 67% higher than the year earlier.

The pattern is continuing this year, with Ebitda up 10% in the first half to $1.83 billion and underlying earnings up 15% at $781 million.

Cleaning up Rio Tinto Aluminium’s portfolio involved work across the board, Barrios notes: “I wouldn’t say there was one silver bullet that sorted out the issues. Credit goes to all the people that work in Rio Tinto Aluminium across the world. I’ve been leading it for the last four years – you set a direction, you give it support, but in the end it’s really about the people,” he adds.

Another challenge facing Barrios was to integrate the Alcan business fully into Rio Tinto, something that was not yet complete. Part of this included retiring the legacy name Alcan and referring to the business as the Aluminium product group, similar to other Rio Tinto business units.

“People had been questioning whether Rio Tinto should be in aluminium and I think now, it’s clear that the company sees aluminium as one of the core businesses – it’s the second largest business within Rio Tinto and it differentiates Rio Tinto in the market,” Barrios says. “The last four years have been transformational not only for the aluminium business and its performance and growth opportunities, but it’s also seen by Rio Tinto and the market as being a key contributor to the group’s future,” he adds.

Segmented strategy
Within its three segments, bauxite is a clear growth area for Rio Tinto Aluminium. Already the world’s largest producer with 50.7 million tonnes last year, and a creeping capacity increase of 6-7% a year on average, the company is also a leader in the seaborne bauxite trade, with third-party shipments of 32 million tonnes in 2017.

Additional growth will come with the development of the Amrun bauxite mine on the Cape York Peninsula in north Queensland, Australia. The mine, which Barrios says will be “a real step-changer in the company’s position in the bauxite market,” will have a planned initial output of 22.8 million tonnes per year with production starting in the first half of 2019. Its progression was one of the first key things Barrios pushed when he arrived at Rio Tinto Aluminium.

“Amrun is a first-quartile bauxite mine with 40-plus years of life – it’s going to really transform the business and continue to make us a major player in the seaborne market,” he adds, noting that it is expandable to satisfy increasing demand.

Rio Tinto Aluminium is also investing further in the Compagnie des Bauxites de Guinée (CBG) bauxite mine in Guinea, a project approved in 2016 to boost output by 4 million tonnes to 18.5 million tonnes. The first incremental shipment at the mine, a joint venture with Alcoa, Dadco Investments and the government of Guinea, is due in the fourth quarter of 2018.

In smelting, Barrios has focused on performance improvements, including creeping capacity – an above-average 1% at its core Canadian operations – and cutting costs.

It has completed or announced divestments of stakes in a range of non-core assets, including the Alucam, Soral, Lochaber and Dunkerque smelters, Isal in Iceland, Aluchemie in the Netherlands, plus Carbone Savoie, Alessa, ECL and a fluoride plant in Sweden. The decision to close the Gove refinery permanently was made late last year.

Rio Tinto Aluminium’s smelting business is still a significant one in the global industry with annual production of 3.6 million tpy of aluminium, operated on a 100% hydropower basis in Canada, but it is now focused on value, not volume, Barrios says. With the “faster than expected” turnaround in the aluminium market, the company has several brownfield expansion options available, particularly in Quebec.

“We’re currently working on these projects to make sure we’re ready to capture the opportunity when the market needs the additional metal,” Barrios says. “We repositioned the whole smelting business and made sure we had a very robust and sustainable business through the cycles delivering strong Ebitda margins. Now with the changes we’re seeing in the industry, we are focusing on our growth options in addition to continuing to deliver productivity improvements,” he adds.

Aluminium demand has been constant, despite industry challenges, Barrios says, forecasting an average rise in consumption of around 4% over the next five years, particularly driven by transportation.

But it is the supply side of the market that has been changing more rapidly and favorably than most had anticipated. In a marked change to previous years, China has stepped up moves to curtail aluminium smelting capacity, launching policy initiatives to cut output that does not have an operating license or that creates pollution during the winter heating season.

“We always thought China would implement supply reforms related to energy and environmental issues, but we weren’t forecasting things to change quite so fast. We have seen quite significant shifts last year, that continued this year,” he says, noting the market “really tightened in the short term, and that’s been driving prices up.”

But the trend is most likely here to stay and will continue, Barrios adds, which means that China is now likely to become broadly balanced in aluminium instead of being a net exporter, with serious implications for the rest of the world.

“As we see the surplus capacity in China and above-historical level inventories come down because of the market deficit, there will be a requirement for new capacity outside China. That situation seems now to be going to happen sooner rather than later,” he says, adding that the company’s brownfield growth prospects plus its hydropower positions Rio Tinto Aluminium well.

For now, the company’s roughly 8-million-tonne alumina business is balanced in terms of supply to Rio Tinto Aluminium’s smelters.

“We’ve been focused on turning around the alumina business. When I arrived, it was not very stable – production was below nameplate capacity and the refineries, especially the ones in Australia, were losing money,” he notes, adding that the last four years have been “transformational.”

Trade actions
Rio Tinto Aluminium, which supplies a third of the North American market from its Canadian assets, has been “very much involved” with the ongoing trade situation in the region. In June, the United States implemented Section 232 tariffs against aluminium imports from Canada, Mexico and the European Union, adding a 10% tax on aluminium from these areas. A round of retaliatory tariffs has followed.

The knock-on effect is clear: Canada supplies about 45% of US primary metal needs, with about 70% of the country’s aluminium production destined for its neighbor. For its part, Rio Tinto Aluminium is the largest producer of primary aluminium in North America, with about 75% its material supplying more than 35 US states.

Barrios is of the view that the integrated nature of the North American aluminium industry will ultimately win through. “While trade tensions will arise from time to time, there’s more to be gained from fair trade than raising barriers. That’s why we believe that at the end of the day, common sense will prevail and the aluminium market will be recognized as one that is highly integrated and highly inter-dependent, where Canada is a secure supplier to US manufacturing companies,” he says.

“It’s a reliable, high quality, well-established supply stream with the lowest carbon footprint in the world, responsibly produced both environmentally and socially, and at the same price as other imports that may not offer these values. One has to keep all that in mind,” he adds.

Rio Tinto Aluminium’s roots in fact date back to 1902, when the Northern Aluminum Company Ltd, later to become Alcan, was founded in Quebec by Alcoa, then named the Pittsburgh Reduction Company. It was during the future First and Second World Wars that the relationship intensified. By the time of the latter, Canada supplied half the aluminium used by allied forces in planes and other military assets during the 1939-45 War.

The Shipshaw power project, recently expanded by Rio Tinto Aluminium through the addition of a new turbine, was built at the Saguenay River, Quebec in 1943 and was a vital part of the ramp-up of the allied manufacturing capabilities, Barrios says – one of the great examples of North American defense co-operation, he notes. “Today, Shipshaw is a key component of Quebec’s hydroelectric power network for the smelters which provide aluminium to US customers,” he adds.

The defense link between the two countries has continued since, Barrios notes. It has been enshrined in US and Canadian law for around 30 years, when the US federal code formally recognized Canada as a part of the US National Technology and Industrial Base for national security and defense planning purposes. “Ultimately, it’s in everybody’s interest to have a globally competitive aluminium manufacturing industry in North America, which can support growth and economic jobs on both sides of the border,” Barrios tells Metal Market Magazine.

It is a two-way street: three out of every four cars sold in America contain aluminium from Canada, while one out of every three car and truck wheels manufactured in the US contains aluminium that Rio Tinto produces in Canada. Parts cross the border sometimes more than half-a-dozen times before finishing in a vehicle that ends up in a sales lot in either the US or Canada, Barrios notes.

“We need to ensure that we don’t damage this integrated supply chain that has been built over years, which provides a competitive advantage to those countries. We need to work on how we improve and strengthen that industry to make it more globally competitive through partnerships,” he adds.

Technology partnership
One investment decision that is powering ahead is a joint venture between Rio Tinto and Alcoa with support from the governments of Canada and Quebec, plus leading global consumer electronics firm Apple, to license and sell technology creating carbon-free aluminium. The new company, Elysis, will receive funding totaling Canadian $188 million ($146 million) and is headquartered in Montreal with a research facility in Quebec’s Saguenay-Lac-Saint-Jean region.

The technology is pioneering: it will produce oxygen while cutting out all direct greenhouse gas emissions from the traditional smelting process. As Barrios says, “It’s the holy grail the industry has always been looking for.”

He adds: “I always get excited talking about what is truly a groundbreaking partnership. It’s the greatest technological advancement in our industry in the last 130 years – putting oxygen back into the atmosphere,” he adds.

On average, the aluminium industry generates 12 tonnes of carbon dioxide (CO2) emissions per tonne of aluminium produced at the smelter, analysts estimate. The technology is already proven, with the companies now working to scale it up to commercial level by 2024, when the technology package will be available to the market for retrofitting existing facilities or for the construction of new plants.

If implemented at Canada’s existing aluminium smelters, the technology has the potential to reduce annual greenhouse gas emissions by about 6.5 million tonnes in the country – the equivalent of taking 1.8 million light-duty vehicles off the road.

Environmental benefits aside, it will boost the anode life by 30 times, cut operating costs by 15% and increase productivity by the same amount.

The partnership with Alcoa surprised many when it was announced, Barrios acknowledges – “We’re both very, very protective of technology, and we each see it as a key differentiator” – but it came about as a result of encouragement by mutual customer Apple, now an Elysis investor. “The real marriage broker is Apple, a customer of our low-carbon aluminium. When we were speaking to Apple about the work we’re doing, they researched a bit further and found out that Alcoa was also quite advanced,” Barrios says.

“Apple encouraged Alcoa and Rio Tinto to talk to each other; our respective lawyers as you can imagine had to prepare quite thick documents to make sure we could do that properly! Then we realized, ‘Wow, we have an opportunity to really accelerate this if we share what we’re doing because it’s complementary,’ and that’s what we’ve been doing for the last couple of years,” he adds.

It is not the first time the aluminium world has worked on its sustainable production credentials: Rio Tinto Aluminium was the first to produce low-carbon metal that reduces CO2 emissions to under four tonnes via its RenewAl brand, launched in 2016.

Rio Tinto Aluminium also recently received chain-of-custody certification under the Aluminium Stewardship Initiative (ASI), confirming it as a company selling aluminium that customers know has been produced to the highest environmental, social and governance standards. The certification spans the Gove bauxite mine in Australia to Rio Tinto’s alumina refinery, aluminium smelters and casthouses in Quebec, Canada. Rio Tinto is now working with the ASI on audits and certifications for other sites in its global aluminium business.

“People ask us why we do all this, and the answer is because we think responsible production can make a difference in today’s modern society,” Barrios says. “Every time we meet with our customers we see responsible production being increasingly important for them and their customers, as well as the consumers who buy the end-products. This is an area where Rio Tinto is seen as the industry leader and Elysis is just the latest step on this journey,” he adds.

This article was first published in the September issue of Metal Market Magazine, which carries in-depth feature articles, analyses and reviews of metal and steel markets.

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