Editorial: Alcoa hunkers down as aluminum slumps

As the first large mining company to release its financial results every quarter, Alcoa has always been a pacesetter among the majors.

During first week of 2012, however, the aluminum giant took what may be a far more significant lead among base metal miners with its shocking announcement that it would rapidly close or suspend 531,000 tonnes of its highest-cost smelting capacity worldwide, or 12% of its 4.51-million-tonne global capacity. This represents 1.1% of all aluminum smelting worldwide.

Despite the grand, big-picture optimism regarding a once-in-a-lifetime bull market for commodities driven by historic industrialization of populous countries such as China and India, the aluminum market got ugly in the fourth quarter of 2011, and has shown persistent weakness over the last eight months.

In the fourth quarter alone, average aluminum prices on the London Metal Exchange declined 13% compared to the third quarter, and are off by 29% from their peak in May 2011 in response to concerns over slowing global economic growth and potential oversupply of aluminum. 

Once more aluminum producers release their fourth-quarter results, it will be clearer just how much of the world’s aluminum was produced at a loss in the fourth quarter. For its part, Alcoa lost US$193 million on continuing operations, compared to a US$172-million profit in the third quarter.

Nevertheless, Alcoa sees the bitter medicine as a short-term setback, and is forecasting 7% growth in aluminum demand in 2012 and a global aluminum supply deficit in 2012.

• Rio Tinto’s Alcan unit has been grappling with its own aluminum issues, having locked out 800 members of the Alma aluminum workers’ union at its aluminum smelter in Alma, Que., after their contract expired on New Year’s Day.

Some 200 managers are running the plant at about a third of its 430,000-tonne annual capacity, and they say they can continue that way for at least a year. 

A big sticking point is Rio Tinto’s increased use of subcontracters to replace retiring workers who were unionized and full-time.

More recently, Rio won a court injunction against picketing workers, reducing their number to 20 on the picket line until at least April, and limiting their proximity to the facilities to 150 metres.

The timing of the lockout during an aluminum slump will likely result in many bitter days on the picket lines for workers, reminiscent of the strikes against Vale Inco in Ontario and Labrador, which coincided with a cratering of nickel prices that provided little incentive for the Brazilian giant to come to terms with its employees and resume production.

On a more upbeat note, in early December Rio Tinto’s board green-lighted one of the largest private-sector investments in B.C.’s history: a $2.7-billion investment to complete a US$3.3-billion modernization of its Kitimat aluminum smelter in northwest B.C., due for completion in 2014.

The project will boost the smelter’s production capacity by more than 48% to 420,000 tonnes per year, and is expected to move it from the third quartile to the first decile of the industry’s cost curve.

Rio says the modernization project will secure 1,000 stable, specialized jobs in B.C.’s northwest for the long-term, and 2,500 jobs during the peak construction period.

• Short-term pullbacks are being seen in other base metals, too.

The weakness in molybdenum prices has resulted in Australia’s Moly Mines shelving development of its large, Spinifex molybdenum-copper mine in Western Australia. Back in June, the China Development Bank had signed on to provide a US$454-million loan to help finance the project. 

In Canada, CaNickel has been forced to trim production rates at its Bucko Lake nickel mine in Manitoba in order to preserve cash for more pressing development work.