aluminum
aluminum: world market prospects
for troubled times
Goran Djukanovic
Aluminum and alumina prices and
production volumes dropped signifi-
cantly in 2008 due to the worldwide
economic recession. This paper pro-
vides a comprehensive analysis of the
current state of the aluminum industry
and its outlook for the future.
iNtroductioN
By the fourth week of January 2009,
aluminum prices had fallen to $1,400/
t—a level not seen since September
2003. Consequently, the average price
for the first quarter has been predicted
by some analysts to be as low as $1,300.
Producers around the world have react-
ed to the low prices. By mid-December,
production cuts were seen in China, the
United States, the United Kingdom,
Eastern Europe, and Ukraine. In 2009,
more reductions may come in Asia, Eu-
rope, and in some other regions, too.
This paper provides a comprehen-
sive analysis of the state of the alumi-
num industry in challenging economic
times.
recessioN: impact oN
productioN costs
For purposes of comparison, copper
production costs, especially for lower-
cost producers, were much lower than
copper prices over the last several years,
resulting in significant profits for pro-
ducers. However, aluminum production
costs at more than half the smelters in
the world approached the London Met-
als Exchange (LME) price, even when
prices were reaching record levels, as
was the case in the summer of 2008.
That is the main reason aluminum
prices cannot fall much lower or re-
main low for long, as was the case with
copper, nickel, and some other metals;
producers will have to start reducing,
or even stopping, production to prevent
Vol. 61 No. 2 • JOM
further losses or continued decreasing
prices. In general, many regions around
the world will be in jeopardy over the
next two years of losing their primary
aluminum production. Particularly af-
fected will be Europe and the United
States, where production costs are the
highest in the world.
Since electricity prices will remain
high, or even increase in some regions,
production costs of smelters, where
electricity is the major input cost, will
remain high. Eventually, falling raw
material prices and other major input
costs, as well as the rising U.S. dollar,
can be expected to bring relief to pro-
ducers, or at least partially offset losses
caused by falling LME prices.
Currency analysts expect the U.S.
dollar to continue to strengthen over
the euro by mid-2009, while by the end
of 2009 the dollar may start weaken-
ing again. Still, it will largely depend
on measures and policies undertaken
by the new U.S. administration. Base
metals prices showed high sensitiv-
ity to U.S. dollar movements in recent
months, and even years.
The next two years, especially 2009,
will finally see the effects and the se-
verity of credit and financial problems
that appeared in the last 18 months; it
is very possible that the worst has not
come yet. Before the new measures to
aid the financial markets start to show
results and the new economic cycle
gathers pace, the aluminum industry
must pass through a period of serious
challenges. Many producers now strug-
gling to survive will disappear sooner
or later. Companies that secured elec-
tricity supplies at favorable prices, ei-
ther through their own power plants
or through contracts with electricity
distributors, will be able to continue
production during the period of lower
www.tms.org/jom.html
Market Analysis
LME prices with minimal losses or
even with profits. Companies that sold
part or all of their production last sum-
mer, by hedging two or three years
in advance, at prices of $3,000/t and
higher, will also be able to survive the
economic slowdown, even with not-
so-favorable electricity costs. Similar
protection is possible with the rising
U.S. dollar, too. Of course, companies
should anticipate aluminum prices will
fall and ignore those forecasters claim-
ing prices will rise to over $4,000/t in
the next two years.
London Metals Exchange aluminum
stocks are continually rising, despite
some production cuts in recent weeks.
In the fourth week of January 2009,
those stocks exceeded 2.5 million
tonnes, over 2.5 times higher than at
the beginning of 2008 and the highest
level since 1994.
Russia and China may buy quantities
of aluminum, up to 1 million tonnes
each, early in 2009, to replenish their
strategic stockpiles. This should stabi-
lize, or even push up prices for a while,
though it is doubtful that any sustain-
able impact on prices would result.
Moreover, the market (price) may be
unaffected by purchases of Russia and
China if those purchases amount to less
than 1 million tonnes.
The fact that the Chinese govern-
ment is bringing back export benefits
on aluminum products will additional-
ly increase pressure on the price some-
what.
alumiNa priciNG aNd
productioN treNds
By the beginning of December, spot
alumina prices outside of China fell to
around $200/t on an FOB basis, from
the $380–430/t range seen for much
of the year, indicating plentiful sup-
63
 2.40 tion during the third quarter of 2008
removing over 3 million tonnes of
2.20 annual capacity from the market. In
addition, Reuters reported that Alu-
2.00 minium Corporation of China Ltd.,
(000) USD /mt

or Chalco, the world’s third-largest

1.80 alumina maker, had idled 38 percent
of its total annual alumina capacity, or
1.60 Figure 1. The price 4.1 million tonnes, as of November 5,
of aluminum in
$1,000/mt for a 2008, responding to lower prices and
1.40 three-month peri- aluminum output.
od from October 8 World alumina production is ex-
1.20 to January 8,
16 Oct. 24 Oct. 1 Nov. 9 Nov. 17 Nov. 25 Nov. 3 Dec. 11 Dec. 20 Dec. 28 Dec. 5 Jan. 2009. pected to reach 84 million tonnes in
3 Months (Wednesday, October 8, 2008 — Thursday, January 8, 2009 2008, compared to 75.4 million tonnes
in 2007. The expected surplus in 2008
is 3.5 million tonnes while up to 20
plies and reacting on falling alumi- primary aluminum capacity closures million tonnes of new capacity will
num prices. Indian Nalco sold its last and lower consumption. Average glo- be ready for use in the next two years.
spot alumina tender for 30,000 tonnes bal production costs were around This will inevitably result in further
at $194.10/tonne at the beginning of $350/t in 2008 but should decrease in production capacity closures and pres-
January. A month before, Nalco sold 2009 by approximately 40% on lower sure on the price, especially in light
the same quantity at $206.38/t, while input costs. of weakening aluminum demand and
a new tender for the same quantity has China is expected to produce around falling prices.
been scheduled for February 3. Nal- 24.2 million tonnes in 2008, while pro-
New smelters and
co’s alumina tender is usually seen as duction in 2009 may stay the same, or
capacity expansion
a benchmark for prices in the global only slightly increase to 24.5 million
aluminum and alumina industry. tonnes. At the same time, capacity of According to Hydro Aluminium,
It is not likely that the downward alumina is expected to rise 24 percent, world aluminum demand will reach
trend will continue; prices should stay to 33 million tonnes in 2008 after hav- 62 million tonnes by 2015, which is
in the $180–230/t range during the first ing surged nearly 40 percent in 2007. around a 22 million tonne increase
half of 2009. Prices lower than this However, it has been reported that over 2008. It implies over $100 billion
would cause further capacity closures, several large Chinese producers, who in total investments over the next sev-
while higher prices will be limited by use imported bauxite, stopped produc- en years. To meet demand, the world

Table I. Major New and Planned Primary Aluminum Capacities*

Expansion New Total
(Brownfield) Smelter Capacity Production
Name Country Company t/y t/y t/y Start

Sohar Oman Sohar Aluminium Smelter — 350,000 350,000 Q4 2008

(700,000)
Boguchankoskoye Russia UC Rusal — 600,000 600,000 Q2 2009
Irkutsk Russia UC Rusal — 750,000 750,000 Q3 2009
Qatalum Qatar Hydro Aluminium & — 585,000 585,000 Q4 2009
Qatar Petroleum (JV)
Orissa India Vedanta — 500,000 500,000 Q4 2009
Isal (Straumswik) Iceland Rio Tinto Alcan 280,000 — 460,000 Q2 2010
Kitimat Canada Rio Tinto Alcan 125,000 — 400,000 Q2 2010
Emal United Arab Emirates Dubal & Mumadala — 700,000 700,000 Q2 2010
Develop. Co. (JV) (1.4 mil)
Helguvik Iceland Century Aluminum Comp. — 150,000 150,000 Q4 2010
(250,000)
Salco Malaysia Cahya Mata Sarawak Berhad — 550,000 550,000 Q4 2010
(CMSB) & Rio Tinto Alcan (JV) (720,000) (1.5 mil)
Aditya India Hindalco — 260,000 260,000 Q2 2011
Mahan India Hindalco — 360,000 360,000 Q3 2011
Az Zabirah Aluminium Saudi Arabia Ma’aden & Rio — 750,000 750,000 Q2 2012
Tinto Alcan (JV) ( delayed)
Coega South Africa Rio Tinto Alcan — 720,000 720,000 On hold
* Source: companies’ reports / Selection: Goran Djukanovic / (nb: China not included) / November 2008

64 www.tms.org/jom.html JOM • February 2009

 58 prices to return to the high values
seen in 2008. This is because of ex-
54 pectations that the financial crisis and
recession in the United States should
50
U.S. PMI

culminate by summer 2009, and mar-

46 kets will rebound in the second half
of 2009. However, it would be more
42 realistic to expect the crisis in North
America and Europe to spread to Asia
38
and other regions after it culminates
34 there, by the end of 2009. The bleak
Mar. 06 Sep. 06 Mar. 07 Sep. 07 Mar. 08 Sep. 08 economic climate from 2009 might be
a then reflected in prices during most of
62
2010, regardless of better economic
58 data and increased confidence among
consumers and investors expected to
54
occur during 2010. Consequently, it
China. PMI

Figure 2. The Purchasing 50 would not be a big surprise for base

Managers Index (PMI) in (a) the
United States and (b) China,
as an indicator of economic
health, has significantly fallen
in last few months. (Source:
Mitsui Daily Snapshot)
b
would need six new smelters each year
with 500,000 t/y capacity.
CRU (an independent business
analysis and consultancy group based
in London) sees strong growth of pri-
mary aluminum capacity in 2007–2012
of 17.4 million tonnes. However, some
planned aluminum capacity expansion
may be postponed, or even cancelled,
due to the global economic slowdown,
especially if the trend of lower metal
prices continues through 2010. A
number of existing capacities will also
face closures in the coming months.
Only projects already on the way may
be counted, while those still on paper
need to be approved.
Still, Rio Tinto Alcan may add 1
million tonnes of brownfield capacity
46
42
38
Mar. 06 Sep. 06 Mar. 07 Sep. 07 Mar. 08
in Canada by 2011. The company plans
to spend $6 billion to boost capacity in
Canada while taking advantage of in-
terest-free loans and cheap electricity
supplies.
Saudi Arabia plans to build five alu-
minum smelters in the kingdom and
become the biggest producer and ex-
porter of the metal in the Middle East.
The new plants will be built at a cost
of $17 billion and will have the capac-
ity to produce 3.1 million tonnes of
primary aluminum by the end of 2012,
according to a report from a local state-
controlled National Commercial Bank.
Outlook
The latest reports show that, by
2010, most analysts expect the metal
metal prices to average even lower in
2010 than in 2009.
One of the major challenges for ana-
lysts in recent years was to predict ex-
actly when prices would finally peak,
Sep. 08 or when the cycle would end. Now the
answer is needed for when the prices
will bottom out and the new cycle will
commence. The prognosis varies from
six months to up to two years, before
new economic growth gathers pace.
According to some of the latest fore-
casts (end of October), Deutsche bank,
for instance, expects the average alu-
minum price in 2009 to be $1,874/t and
$2,249/t in 2010, while the UBS bank
is even more pessimistic and forecasts
$1,654/t in 2009 and $1,984/t in 2010.
Citigroup is predicting $2,205 in 2009
and $2,645 in 2010.
In the most recent poll of analysts
and industry experts, at the LME Week
Base Metals Summit in October 2008,
70 percent of the delegates expected
the global economy to be much weaker
over next 12 months. Eighty percent
expected base metals prices to bottom

3,500 60

3,000
Aluminum Inventories
50 (Days of Consumption)*
USD Per Tonne

2,500
Al Price (LME 3 Months)
Days

2,000 Average Inventories

40
1,500

1,000 30
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Figure 3. World aluminum inventories. (Source: Hydro Aluminium)

Vol. 61 No. 2 • JOM www.tms.org/jom.html 65

out before the end of 2009, while the
rest of delegates believed that prices
will rebound by the end of 2008. In the
poll, participants were asked to fore-
cast the range that cash base metals
prices would be trading in October
2009. For aluminum the range was
$2,000–2,500/t.
In the long term, during 2012–2020,
due to new, strict procedures for re-
stricting emissions as well as rising
energy costs, the aluminum industry
may experience increasing costs and,
consequently, prices, even when there
is no significant deficit in the market.
Aluminum prices may reach record
levels during this period and at the
peak of the new cycle.
The main support for aluminum
price is expected to come from rapid
urbanization and economic and de-
mographic development in China and
India especially, which combined ac-
count for about one-third of the total
world population. Rising per capita
usage in these countries, which has
been insignificant until recently, will
be reflected in increasing demand and
consumption.
66
Conclusion
Aluminum and alumina markets will
be in surplus at least until 2012. Dur-
ing that period stocks may grow even
further, although the increase would be
limited by capacity reductions of both
aluminum and alumina.
The aluminum industry today has be-
come more flexible and better prepared
to meet market surprises on either side.
If needed, rapid expansions of smelter
capacities, as done by China in the past
few years, will prevent any considerable
deficit in the near future. Most recently
constructed smelters, such as those in
Canada, Iceland, the Gulf countries, and
Russia, have been built with complete
infrastructure (energy, installations for
raw material supplies, etc.) to quickly
increase and even double production.
There is a small chance China will
become a net importer of aluminum
during this period. If this happens, re-
percussions on the aluminum industry
and the market will be limited, without
significant influence on prices. Taking
into account economic climate and new
greenfield capacities commencing pro-
www.tms.org/jom.html
duction in the next 2–3 years, it is not
realistic to expect the aluminum price
could reach new record levels before
2012.
The only exception would be for the
case of high tensions and wars in those
regions where the aluminum industry
is concentrated. It is estimated that the
aluminum industry of the Gulf coun-
tries, for instance, may account for 10%
of global production within five years.
This would mean that not only would
oil prices temporarily explode with ten-
sions or clashes in the region, but so
also would aluminum prices.
Finally, further consolidation of the
aluminum industry, within large diversi-
fied companies, may mean a secure hub
for their aluminum segments and fewer
oscillations in production, demand, and
price, but also a greater potential in-
fluence on price. This is because large
quantities are concentrated in single,
relatively small regions, or even with
one producer with operations in differ-
ent regions of the world.
Goran Djukanovic is an aluminum market analyst
based in Podgorica, Montenegro. Mr. Djukanovic
can be reached at gordju@t-com.me.
JOM • February 2009