Prospects for the aluminium industry have worsened in the short term, with prices and margins weakening on fears of a global economic slowdown. Cash aluminium prices on the London Metals Exchange have fallen from a peak of more than US$3000/t in 2008 to around $2200/t.
Yet in the long term and the right environment, aluminium — used in a range of products from beverage cans to roofing — can be a good business.
Natixis Commodity Markets says in its fourth-quarter Metals Review there is likely to be solid demand growth for aluminium in the next few years because of rising incomes in developing countries. Prices will be underpinned by rising energy costs, since this is an energy- intensive industry.
Alcoa, the world’s biggest producer of primary and fabricated aluminium, which has about 5Mt of smelting capacity around the world, recently reported disappointing third-quarter earnings as aluminium demand slowed and prices softened.
“We continue to forecast a growth rate of 12% for 2011, with a slower pace in the second half of the year, and reaffirm our long-term forecast for a doubling of aluminum demand by 2020,” CE Klaus Kleinfeld says .
Rio Tinto, reporting third-quarter production, says cost pressures are returning to the aluminium industry, “including the effect of stronger currencies and the higher costs of caustic, coke and pitch”.
BHP Billiton CE Marius Kloppers will report on third-quarter production this week . In the year to June the group’s aluminium division, which includes operations in Western Australia, Brazil, Mozambique and SA, grew its contribution to group revenue but underlying Ebit fell on higher costs, a weaker dollar and a tax provision.
Despite the long-term attractiveness of the sector, questions have been asked for the past few years, particularly since the Eskom electricity crisis in 2008, whether SA really needs Billiton’s two massive smelters near Richards Bay, Hillside and Bayside.
In the controversy around preferential electricity tariffs agreed with the aluminium smelters when SA had surplus electricity, it was suggested all Billiton does is “export cheap electricity”. Another criticism is that smelters are not particularly labour-intensive, and SA needs jobs.
Billiton has been investing in its Alumar refinery in Brazil and the Worsley refinery in Western Australia, but not in SA.
BHP Billiton aluminium SA asset president Gustav Griessel told journalists on a visit to the Hillside smelter last week that about 95000t of capacity was permanently taken off line at Bayside a few years ago. This was the result of a decision to streamline and reduce the number of products. Bayside now focuses exclusively on aluminium slab, while Hillside produces ingots. Between Hillside and Bayside, Billiton has about 700000t/year of aluminium capacity.
To make aluminium, the smelters require bauxite, coking coal and pitch, none of which is available locally in suitable quantity or quality, so have to be imported.
Griessel says all the SA aluminium production is available to the local market, if needed. Any surplus is exported. The biggest local customer is Hulamin. Billiton’s agreement to supply rolling slab to Hulamin from Bayside was extended to June 2012. Hulamin says negotiations are under way to renew the agreement beyond that.
Billiton directly employs about 1200 people at Hillside and 450 at Bayside, and 900-1000 contractors at Hillside and 300-400 at Bayside.
Econometrix MD Rob Jeffrey says though developed countries are almost certainly facing a second slowdown, necessitating fundamental structural changes, industrial growth in Asia is still positive for mineral- rich Africa and SA. Mega projects, like aluminium smelters, are needed to produce enough goods for export at competitive prices , but mega projects are capital- and energy-intensive.
Billiton appeals to investors because it chooses long-life, low-cost projects in the right destinations. Unless SA can overcome its power issues and a history of incoherent government policy, it will not be one of those destinations.
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