Aluminium giants cash in during boom

Press, 11 September 1980, Page 14

Aluminium giants cash in during boom

From the "Economist,” London

Aluminium’s years of headlong growth are long gone. But the world’s six largest aluminium producers—Alcoa, Alcan, Reynolds, Kaiser, Pechiney and Alusuisse — which own about three-fifths of the Western world’s smelting capacity between them, are not crying on their way to the bank. They start this recession much stronger financially and in the market than most metal fabricators making rival products. And they look forward to a real bonanza in the next upswing if, as most expect, supply tightens sharply by the middle of the 1980 s. World aluminium consumption should fall by about 3 per cent this year (largely because of an 8 per cent drop .in the United States). This may drag producer prices down from their present highs, but the six majors should still make handsome profits in 1980. Alcan’s export price, the benchmark for internationally traded aluminium, is now $1750 per tonne, $350 higher than last year’s average and $Bl5 higher than 1976’5. The major aluminium companies are reaping the dividends of an armistice in their price war. Earnings of the North American producers boomed last year and have continued strongly in the first half of this. Kaiser Alum--inium’s net earnings rose 60 per cent to $232M last year, although the volume of aluminium Shipments rose only 3.5 per cent. Reynolds Metals’ shipments were lower in the first six months of 1980 than in the same period of last

year but sales were up 11 per cent, at $l.B billion, and net income was 13 per cent higher. Alcoa’s shipments fell 4 per cent, but sales receipts rose 9 per cent, to $2.6 billion’, and net income rose 11 per cent. The big aluminium firms have pushed themselves into profits by underbuilding at a time of sluggish growth. Since 1976 capacity has increased only 7 per cent, while demand has risen by 11 per cent (to 12.4 M tonnes last year). As a result, capacity utilisation has increased from 81 per cent in 1976 to 90 per cent this year. World aluminium stocks of about 12 per cent of consumption are much lower than at the same stage of the previous cycle (particularly in Europe), largely because of energy supply problems and a threemonth strike at Alcan’s Quebec smelters. The industry is forecasting that demand will grow at about 5 per cent a year over the next five years. On this basis, its soothsayers predict a further tightening of supply by 1984 if, as expected, capacity increases about 4 per cent annually. On that basis, capacity-use should rise from 88 per cent last year to 94 per cent in 1984. Will this long-predicted aluminium shortage materialise? Only if aluminium continues to take business away from other metals, particularly steel, tin and copper. During the 1960 s world demand for primary aluminium rose at twice the rate of economi" growth in

the OECD area. The ratio dropped to Ikl in the 19705. But the industry is expecting that the ratio will not slip further in the next five years. It thinks the transport industry, which consumes about 22 per cent of aluminium in the United States is likely to increase its demand for the metal substantially, to build lighter, fuel-saving cars. And it hopes Europe will follow America’s switch to aluminium drink cans. Whatever the industry’s ability to meet demand in the mid-1980s, its shape will be irrevocably altered in the course of the decade. Energy costs are now up to half the total costs of producing aluminium from bauxite. The energy problem prevents much extra growth in capacity in t: e biggest producer, the United States. Alumax’s 190,000-tonne-a-year smelter at Umatilla, Oregon, for example, has been waiting for over a year t-' hear whether the Bonneville Power Administration will let it have a slice of energy. Japan, with the highest power costs of all, closed |M tonnes of smelting capacity in 1978. It looks like staying closed. Further cuts were announced this week. Alone among traditional aluminium producers, Canada has plans for expanding capacity, because its industry still has access to more hydro-elec-tric power. Alcan will have a new 170,000-tonne-a-year smelter in production in Quebec by ’.981 and is con-

sidering building two more in British Columbia. In the past, smelting facilities, have been located near their biggest markets. In the future, an increasing slice of new capacity will be located in areas where there is access to both bauxite and cheap energy. Australia has both — the ■world’s biggest commercial reserves .of ■ bauxite and large supplies of steam coal. It expects to produce aluminium at one third the energy cost of smelters in America.

By the end of the decade, Brazil and Venezuela may be just as attractive. Brazil has huge bauxite deposits in the Amazon bast, and equally vast hydro-electric potential. Alcoa has already started building a 500,000-tonne refining plant and a 100,000tonne smelter on Brazil’s north coast, at a cost of S9OOM. Venezuela has plentiful supplies of cheap natural gas to use’ on bauxite from neighbouring Guyana.

By 1990, America’s imports could rise to about a quarter of total domestic, consumption, from 8 per. cent last year, Most of Canada’s exports, and much of -Latin America’s may be bought by the United Europe is likely to import aluminium from the Middle East. The six • major. producers will be hard pushed to maintain their grip on the aluminium market by the 19905. Until then they will do better than most.