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Can Alcoa’s Latest Production Cuts Restore Supply Balance?

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Production cuts

On November 2, 2015, Alcoa (AA) announced that the company would curtail its aluminum smelting capacity by 503,000 metric tons and its alumina refining capacity by 1.2 million tons.

According to the company, the curtailments would begin in 4Q15 and would be complete by the end of 1Q16. The move is another step by Alcoa to remain competitive in the current challenging operating environment.

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Other curtailments

Alcoa is not the only US aluminum company that is curtailing its aluminum capacity. On October 30, 2015, Century Aluminum (CENX) announced plans to curtail one of the three potlines in its Sebree smelter by December 31. 2015. This is the third curtailment announced by Century Aluminum in the last two months.

In September, the company had curtailed one of the potlines in its Hawesville smelter. The Mt. Holly smelter also risks being idled if Century Aluminum is not able to negotiate a fresh power supply contract by December 31, 2015.

According to Reuters, “Alcoa’s cuts, coupled with recent announcements by Century, represent around 30 percent of U.S. aluminum production and will leave just four smelters operating in the United States, with capacity to produce 759,600 tonnes per year.”

The graph above shows the recent performance of aluminum plays. Aluminum companies have had a rough ride in 2015, which is apparent in their stock prices.

Why US smelters?

For smelters outside the US, costs are denominated in currencies other than the US dollar, although they mostly sell aluminum priced in US dollars. Smelting plants outside the US have benefited from the stronger US dollar and have seen their unit production costs come down in dollar terms. This has provided these smelters with a competitive advantage over similar US-based smelting plants.

Rio Tinto (RIO) has most of its smelters outside the US (SPY). In its 3Q15 earnings conference call, the company maintained its 2015 aluminum production guidance at 3.3 million tons. Norsk Hydro (NHYDY) also has most of its plants in Norway and Germany.

Alcoa’s latest production cuts amount to ~1% of the global aluminum demand. Can it have an impact on global markets? We’ll discuss this the coming parts of the series.

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