The US aluminum industry is going the same way as the UK steel industry we wrote about recently. Faced by relatively higher power costs, higher labor costs, environmental regulations and subsidized competition from China, US aluminum producers are throwing in the towel in their struggle to survive globally low prices.
Not mincing his words, Michael Bless, president and chief executive officer of Century Aluminum Company (O:CENX) is quoted in the Financial Times as saying this week that Chinese metal is transported and processed via “blatantly uneconomic methods that would not be possible but for the large subsidies these Chinese producers are receiving from the government.”
Century Aluminum Shutdowns
Century said it would curtail one of three pot lines at its Sebree, Ky., aluminum smelter by Dec. 31, the company’s third capacity reduction in two months, reducing the 210,000 metric ton-per-year plant’s capacity by around 70,000 mt. The news comes just one week after it announced plans to close its 224,000-mt Mount Holly, S.C., smelter by Dec. 31 if it does not receive a favorable power deal. Only the company’s Grundartangi smelter in Iceland has remained untouched by the cost cutting.
Alcoa (N:AA) Shuts Down Smelters, Too
Reuters reported last week that Alcoa, Inc., will idle three of its four active US aluminum smelters, suspending operations at its Intalco and Wenatchee smelters in Washington state and the Massena West smelter in New York state. In addition, it announced the firm will also permanently close Massena East, also in New York, which was shuttered in 2014 bringing the total closure to 503,000 metric tons and leaving just the 269,000-mt-per-year Evansville smelter in Indiana as its sole US primary plant.
Alcoa and Century’s cuts represent around 30% of US aluminum production and will leave just four smelters operating in the US, with capacity to produce 759,600 mt per year. According to Reuters, quoting the U.S. Geological Survey that is the lowest output since the 1950s and compares with 23 smelters in 2000.
Foreign Smelters Win
So where will firms like Alcoa and Century source their primary metal, you may ask? From overseas is the unfortunate reply. Alcoa runs the massive 760,000 mt per year Ma’aden Aluminium Smelter in Saud Arabia. As capacity has been closed here in the US, it has been supplanted by metal from abroad. In the year through to August 2014, Saudi Arabia shipped 2,700 mt of primary aluminum to the USA, in the same period this year it shipped 66,290 mt. Exports from the UAE and Bahrain also grew substantially, a recent Thomson Reuters article noted.
Not surprisingly as domestic supply has withered, the physical delivery premium has begun to firm, rising to $0.08 per lb. this week, the biggest one-day jump in months and an indication that the one beneficiary of reduced domestic primary aluminum supply will be the London Metal Exchange’s midwest Premium.
The loser will be, collectively, aluminum consumers, who thought they had seen physical delivery premiums retreat to historic levels after LME rule changes and the demise of the stock and finance trade.
The country’s growing reliance on imports, whether near-shore such as with Canada or further afield such as the Middle East, will inevitably add transportation costs and, in a tighter market, the opportunity for producers and traders to demand higher physical delivery premiums. Base prices may remain low but premiums are in for a better ride next year.