Italian Al supply will tighten further on Alcoa’s closure, says market
Aluminium supply in Italy will tighten further and push premiums in the region higher if Alcoa goes ahead with its plan to suspend production at its smelters in Fusina and Portovesme following a European Commission ruling over energy tariffs, market participants said
Aluminium supply in Italy will tighten further and push premiums in the region higher if Alcoa goes ahead with its plan to suspend production at its smelters in Fusina and Portovesme following a European Commission ruling over energy tariffs, market participants said.
Within hours of Alcoa announcing its decision to idle the smelters, some traders were already talking spot premiums higher – one reported offers on an fca basis in the country rising as high as $160 per tonne from $145-150 per tonne.
“We offered $160 and they almost bit our hands off,” the trader said.
There were already concerns about availability in Italy even before the news.
There is almost 140,000 tonnes of aluminium sitting in London Metal Exchange warehouses in Trieste, Genoa and Leghorn.
But most of that is tied up in long-term rental deals and will only be become available in the second quarter of next year, market participants said.
Significant volumes of off-exchange stocks are also in the country - they are thought to be below 100,000 tonnes - but they too are locked up in warehouse deals.
Availability in the Black and Adriatic Sea regions has fallen in recent months, pushing premiums higher. In June, they spiked on news that United Co Rusal sold 800,000 tonnes of primary aluminium to Glencore, leaving the region short of spot material.
Another sale of 500,000 tonnes to the Swiss trading company in September tightened the market again, causing spot duty-paid premiums to spike above $130 per tonne (MB Sept 14).
While the move by Alcoa will put upward pressure on premiums, some were sceptical that premiums have risen as high and as quickly as the first trader suggested.
“$160 is still ambitious. I think as long as there’s plenty of unpaid around, it’ll keep a cap on things,” a second trader said.
Alcoa will idle the Fusina and Portovesme smelters, which produce a combined 190,000 tpy and feed Alcoa’s rolling mill at Fusina, which is close to Trieste.
But the Fusina mill will continue operating, which means Alcoa will need to find alternative sources of feed.
“Alcoa’s a buyer,” one well-positioned market participant said, although the company is understood to have worked out a strategy to continue supplying customers.
Alcoa would be able to supply billet from its Spanish plant for instance, market participants suggested.
The closure of the smelter may mean material in northern Europe gets diverted south, some traders said.
“It could alter the dynamic of northern Europe too,” the first trader said.
The process to shut the plants will start immediately, with completion expected in the second half of December, Alcoa said on Monday night.
While the energy tariffs have been an issue for some time, the news took the market by surprise.
“It was something that’s been looming, but you tend to ignore these things. It’s a shock once it finally happens,” said a second market source. “It does seem to have been a rapid decision.”
The European Commission ruled that Alcoa must repay a portion of its Italian energy tariff because it has received “illegal state aid” since 2006, allowing it to sell aluminium at a lower price and giving it an unfair advantage over its competitors.
Alcoa said the tariff had been approved by the EC in 1995, the same year that it bought the operations.
It was designed to provide competitive power to energy-intensive industries in Italy, in line with similar energy costs in other European Union countries.
“This is a dark day for European heavy industry. The EC is sending a signal to investors and workers that heavy industry is no longer a priority,” Klaus Kleinfeld, Alcoa president and ceo, said in a statement.
“Particularly in today’s economic crisis, this decision is hard to understand. Skilled and long-term jobs will be lost, facilities will be closed and companies in Europe will not be able to compete.”
The company said that without state aid the operations are not viable at current Italian power rates.
Alcoa expects to take a fourth-quarter pre-tax charge of between $300 million and $500 million, including temporary curtailment and recovery actions.
Alcoa will appeal against the ruling.