Aluminum: Too much to handle

Producing aluminum in Brazil got so expensive as electricity prices surged to records this year that Alcoa Inc. idled its Pocos de Caldas smelter and now sells the facility’s power instead of metal.

The worst drought in decades drained reservoirs used to run hydroelectric generators that supply power to extract aluminum, boosting costs already inflated by more spending on labor and transportation. Cities may be forced to ration water, and last week the government cut taxes on imported aluminum to help ease shortages as demand grows for beverage cans.

While the country has the world’s third-largest ore reserves, it is importing more refined metal than it ships after output in July fell to the lowest on records going back to 1996, data show. Aluminum prices this week reached the highest in 17 months as Brazil adds to output cuts that Goldman Sachs Group Inc. said will mean global deficits through at least 2017.

“It’s not economical anymore,” said Milton Rego, executive president of the Sao Paulo-based Brazilian Aluminum Association, known as ABAL, which represents the $18 billion domestic industry. “Its the chronicle of a death foretold.”

Aluminum smelters are electricity guzzlers, with power accounting for as much as half the cost of producing refined metal. Hydro-electric generators that supply about 70% of Brazil’s electricity were limited during the drought, sending spot power prices on Jan. 31, the peak of the Southern Hemisphere summer, to the maximum allowed by the government, or 822 reais ($362) per megawatt hour.
 

Water Risk
 

Sao Paulo, the largest Brazilian city, has struggled to maintain water supplies. Federal prosecutors warned the municipal utility on July 29 to start rationing or risk having its biggest reservoir run out of drinking water in 100 days. Southeast reservoirs were 33.6% full as of Aug. 10, according to ONS, the local regulator. The last time the country faced widespread rationing was in 2001, when dam levels were 20.6% to 34.5%.

Rising costs, including electricity, and “challenging global market conditions,” as aluminum prices reached a four-year low in February, prompted New York-based Alcoa to shutter 147,000 metric tons of capacity in Brazil this year, the company said in an e-mailed response to questions.

Alcoa, which has been closing high-cost plants around the world, said March 28 it would shut a smelter at Pocos de Caldas in Minas Gerais, where it had been refining for four decades. It also cut output by 97,000 tons at the Sao Luis smelter in Maranhao that is 40%-owned by BHP Billiton Ltd.
 

Selling Power
 

As a result, Alcoa was able to sell the unused electricity from the Brazilian plants, generating $40 million in the second quarter, Chief Financial Officer William Oplinger told investors during a conference call July 8. The company says it has reduced smelting capacity by 1.2 million tons, or 28%, since 2007.

The aluminum industry has closed or curbed output at more than 50 smelters outside of China since 2009, according to Goldman, which estimates global demand will exceed output by 579,000 tons this year and 619,000 tons in 2015.

Prices entered a bull market on the London Metal Exchange last month, reaching a 17-month high of $2,056 a ton on Aug. 12. Aluminum has rallied as much as 23% since Feb. 23, when it touched $1,671.25, the lowest since July 2009. Today, metal for delivery in three months rose 0.2% to $2,000.

“Production is declining and will continue to decline,” said Jorge Vazquez, managing director of Harbor Intelligence, an industry researcher in Austin, Texas. “There are high odds that maybe more production curtailments could take place.”
 

Price Incentive
 

The recent surge in prices may encourage some producers to reopen shuttered plants.

“It was made quite categorically clear that some of those Brazilian cutbacks were just price related, and these smelters would come back,” David Wilson, an analyst at Citigroup Inc. in London, said by telephone on July 31. “These are not permanent closures.”

Even with the shutdowns, Brazil still has more than 500,000 tons of idle capacity, according to industry data. Alcoa and Saudi Arabian Mining Co. plan to start commercial production at their Maaden Aluminum joint venture on Sept. 1. In China, the biggest user, higher domestic prices and government subsidies have resulted in a “notable rise” in output from smelters, Citigroup said in a July 16 report.

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