Alcoa Looks at Cutting Capacity

Low aluminum prices have prompted Alcoa Inc. to consider shrinking its global smelting capacity, including reviewing the company’s three operations in Quebec.

The U.S. aluminum giant said Wednesday that it will examine chopping up to 460,000 metric tons of annual capacity, or 11 per cent of its total worldwide.

he company’s three Quebec smelters account for 955,000 metric tonnes of annual capacity, or 22.6 per cent of the firm’s yearly total globally.

Alcoa has 385,000 metric tons of annual capacity at its Baie Comeau site and 260,000 metric tons at Deschambault. The company’s share of capacity at Bécancour is 310,000 metric tons.

With aluminum prices tumbling by one-third since 2011 amid a sluggish global economy, Alcoa said it needs to undergo a comprehensive review over the next 15 months to ensure its efficiency. Future capacity cuts would come on top of previous reductions of 568,000 metric tons worldwide, or 13 per cent, said Chris Ayers, president of Alcoa’s global primary products business.

Besides Canada, the company runs smelters in the United States, Australia, Brazil, Italy, Spain, Norway and Iceland..

“Because of persistent weakness in global aluminum prices, we need to review every option to maintain Alcoa’s competitiveness,” Mr. Ayers said in a statement. “Any action taken will only be done after a thorough strategic review and consultations with stakeholders.”

The Quebec smelters are considered by industry observers to be lower-cost operations. A New York-based Alcoa spokeswoman declined to comment on whether the Canadian smelters might escape deeper scrutiny and emerge with their existing capacity intact. Decisions are slated to be announced after internal studies are finished, and the result could range from scaling back operations to shutting down plants.

“The review will include facilities across the Alcoa system and will focus on higher-cost plants and plants that have long-term risk due to factors such as energy costs or regulatory uncertainty,” the company said.

A recent report by Alcoa on its Canadian operations notes that the Baie Comeau site is undergoing a $1.2-billion modernization project. All three Quebec smelters are seen as energy-efficient, with Hydro-Québec recognizing the Baie Comeau facility last September for its reduction in power consumption.

Alcoa employs more than 3,100 people in Quebec, generating $1.3-billion in economic spinoffs in the province annually, according to the company’s Canadian unit based in Montreal.

RBC Dominion Securities Inc. analyst Fraser Phillips said weak prices for the industrial metal, including declines in the first quarter, have weighed on Alcoa. “The sharp drop in aluminum prices in Q1/13 and recent further declines could push both the alumina and primary metals businesses into loss-making positions,” Mr. Phillips said in a research note.

“Closures should conserve cash and reduce losses, though the stated timeline suggests the move will not help in the near term. Permanent closures could aid Alcoa in its quest to move down the industry cost curve.”

While Alcoa’s Canadian unit emphasized last fall that the Quebec smelters should be seen as “energy efficiency ambassadors,” analysts caution that the aluminum market is generally going through tough times.

“The market is plagued by significant excess inventory and capacity. More concerning is the continued strong growth in capacity, particularly in China,” Mr. Phillips said, adding that lower inventories are needed to clear the way for a sustained rebound in prices for aluminum.