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Global Aluminum Oversupply Causes Continued Price Drops Robert Guy Matthews, Staff Reporter The Wall Street Journal, September 3, 2002

An excess of aluminum on the world market is causing prices to continue their long slide and inventories to remain stubbornly high.

Even China, which still has a voracious appetite for aluminum, is making too much and putting its excesses on the world market, further weighing down prices.

On the London Metals Exchange, a key indicator for the aluminum industry, prices slipped Thursday to 59.1 cents a pound, near its lowest level in three years. A year ago, the price of aluminum was 62.8 cents a pound, and in 2000, it hovered around 70 cents a pound for the year. At the current rate of 59.1 cents a pound, more than 70 aluminum plants throughout the world can't sell their product at a profit, according to Daniel Roling, metals analyst for Merrill Lynch.

In light of the low prices, analysts last week lowered earnings estimates for the year for Alcoa Inc. and other aluminum makers on the assumption that low prices and high inventories would eat into profits.

The problem is capacity. In the first six months of the year, aluminum consumption grew 3%, but production grew at a rate of 4.1%, says Mr. Roling. Even though the nation's economy is showing some signs of strength, and aluminum serves such diverse markets as aerospace, autos and consumer products, the recovery remains anemic. As a result, inventories aren't falling as fast as expected. Mr. Roling now predicts there will be a "sizable surplus" of aluminum in 2003.

Much of that is abroad. Indeed, in the past year, China has increased its production of aluminum by about 25%, India by 11%, and Canada by 7%. With such a soft world economy, China is slowing the amount of imported steel and increasing its exports on to the world market. Importers that depend on sending their aluminum into China are now finding that their Asian sales are slowing and they must find other markets.

In the U.S., which is traditionally one of the leading consumers of aluminum, production has been scaled back. Indeed, Alcoa has shut down permanently 197,000 metric tons of aluminum at two plants and has idled 90,000 tons at another. The company has reduced its aluminum capacity by close to 6%, since 2000. Other smaller aluminum companies located in the Pacific Northwest have also idled their aluminum production.

Even as those plants are being closed, however, Alcoa, Alcan Inc. and others are announcing plans to build plants. Alcoa recently signed a preliminary agreement with the Icelandic government that could result in a $1 billion investment in a 300,000-ton smelter there. The same week Alcoa signed the Iceland deal it announced its U.S. smelter shutdowns.

The move to Iceland is to replace U.S. capacity that has been deemed less efficient and more costly to produce. Economists and analysts say aluminum companies will have to establish more greenfield sites, such as Alcoa's plans in Iceland, to remain competitive, especially in an environment of lower prices.

"Given all this new capacity and some of the idled capacity, over time the cost curve keeps falling and we keep moving toward a lower normalized aluminum price," says Peter Ward, metals analyst for Lehman Brothers.

Savings from lower energy and labor costs are enough to offset the cost of shipping the aluminum to plants around the world where it will be fashioned into airplane parts, cans and aluminum foil.

If Alcoa's plant is completed, aluminum smelters will consume 80% of Iceland's power. The world's second largest, RusAl, a Russian aluminum company, says it, too, is looking to build in Iceland.

Other plants are slated for South Africa, Canada and Brazil, which also have lower energy and labor costs than the U.S.

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