Rio Alcan still cautious on aluminum outlook

Rio Tinto Alcan sees strong demand for aluminum in all sectors but remains cautious about its medium term outlook because of the high level of the inventories in London Metal Exchange warehouses.

Ms Jacynthe Cote CEO of Rio Tinto Alcan said that concerns about European debt, US unemployment, Chinese inflation and the pace of the recovery in Japan also cloud the near term view of aluminum demand.

Ms Cote said that she was bullish long term but those are indicators we look at carefully. The economic recovery will not be linear. There will be ups and downs in the global recovery. Physical demand remains strong in all applications. But we're concerned about whether debt in Europe could bring more pressure on the European economy. China is still fighting inflation. As they do that, will they be able to continue that soft landing? Will Japan recover as fast as we think? US employment is still struggling to go up.

she said that in addition to economic worries the high level of inventories sitting in London Metal Exchange warehouses, tied up in financing deals that could come back into the market if interest rates rise are also concerning. Inventories are tight right now because of the financing deals. Given the fact that the forward price is much higher, investors can buy aluminum set it in LME warehouses for relatively low cost, finance it, sell it forward and capture a profit. If interest rates were to rise, financing costs would also go up, making storing the metal for long periods unprofitable.

Rio Tinto's caution has lead the aluminum producer to focus on modernizing and expanding its brownfield operations in order to bring its costs down. While Rio Tinto Alcan, the combined entity formed between Rio Tinto aluminum and Alcan which was made up of Pechiney, Alusuisse and Alcan is also building Greenfield projects, Cote said, the company wants to pace those projects to market conditions and bring them on as demand begins to pick up. Once inventories come down, it will be time to bring the Greenfield smelters online.

Ms Cote said that the cost curve's steepness should be maintained and if you are well positioned on the low side of that cost curve, you'll get a nice spread with a healthy margin. We've given ourselves a target of 40% margins.

The modernization of its Kitimat smelter is one of those projects. By the end of this year, Rio Tinto will have invested USD 700 million in Kitimat. In the Q4 it will go for full approval from the board to invest the full USD 2.5 billion to demolish the current facility and build a completely new plant at the same site. Assuming decision for full approval for the Kitimat project goes through, metal will be made at the new plant in 2014.

She said that we are building Greenfield smelter while we're producing electricity at Kitimat. As we kill the old production, we're selling electricity as we build. It's not a race to produce the metal as fast as possible. It's an optimum flow to make sure we capture every electron of electricity as we modernize. It's a fine tuning between building the new and destruction of the old.