Rusal Warns on Aluminum Market

The world's largest aluminum producer has laid bare the woeful state of the market for the industrial metal, in which prices are being crushed by tremendous oversupply.

In an interview, United Co. Rusal First Deputy CEO Vladislav Soloviev said more production cuts are needed at a time when prices are making 40% of global output unsustainable.

"It is necessary to do this, otherwise you close everything. It is the only way to survive," Mr. Soloviev said.

Global aluminum supply outstripped demand by 773,000 metric tons in the first seven months of this year, the World Bureau of Metal Statistics said Wednesday. In 2012, the aluminum market recorded a surplus of 506,000 tons.

With vast inventories and uncertain demand, Aluminum prices are falling—down 12% since the start of 2013—and the industry is being forced to focus on costs to improve margins.

In May U.S. aluminum giant Alcoa Inc. said it would consider cutting 11% of its smelting capacity ; and earlier this month GlencoreXstrata said it would slash spending and shelve projects  in a bid to support prices and remain profitable.

Rusal has already shut 350,000 tons of production capacity, and said this week that it is reviewing three more operations, which combined amount to over 300,000 tons of production. Rusal has said the price would have to rise to near $2,400 a ton in order to restart some of its closed capacity. Thursday, LME 3-month aluminum traded around $1,820 a ton.

To be sure, the Federal Reserve's decision to continue its economic stimulus program and indications of economic revival in OECD economies should sustain demand at least in the near term.

Stockpiles of copper held in warehouses certified by the London Metal Exchange have declined 16% since late June's ten-year high, a sign of increased demand from manufacturers, and Chinese demand appears resilient. But stocks of aluminum in those warehouses have fallen just 1%.

Mr. Soloviev said the aluminum industry should cut production and stop all new projects.

"Around 40% of metal is not profitable at current prices," he said.

Whether or not smelting companies in China choose to scale back capacity will be key. The country currently accounts for around half of global production, and has recently swung to being a net exporter, according to the WBMS.

Qin Junman, vice president of China Nonferrous Metal Industry's Foreign Engineering and Construction Company Co. Ltd, said this week that about 2.7 million tons a year of smelting capacity is currently estimated to be under construction in China's Xinjiang, Qinghai, Gansu and Inner Mongolia provinces.

"China in particular should stop production but local governments subsidize operations for employment reasons," said Mr. Soloviev.

Patricia Mohr, Bank of Nova Scotia's vice president of economics and commodity market specialist, said this week at a conference hosted by Metal Bulletin in Geneva that a reduction in Chinese capacity was unlikely.

"China can't be self-sufficient in copper, because it doesn't have the geology, but aluminum is a more manufactured metal." she said. "The nature of their basic policy is one to continue to move ahead on aluminum expansion. Some of the new mills are on bottom of their cost curve, operating at near $1,500 a ton, so they can compete, and they will."