By Stuart Burns
To be fair to Rio Tinto (RIO) ex-CEO Tom Albanese (whose axing we first got into in Part 1), he had only taken charge of the mining company a short while before the Alcan acquisition, and was probably not in a position to change direction at such short notice. Nevertheless, he was left with the problem. Analysts estimate that last Thursday's $11 billion write-down of Rio's aluminum business means it has now written $28 billion off Alcan's original $38 billion value.
While Rio's problems with Alcan were greatly exacerbated by the high price they paid for the asset in the first place, the Alcan story (and particularly the subsequent write-downs) illustrates the malaise of the wider aluminum market. Massive overcapacity in the sector, high energy costs, and weak prices mean that even with the high premiums being paid for physical delivery of metal on the spot market, primary mills are suffering from little or no margin and downstream mills at the more commodity end of the market are under pressure as they cannot pass on the physical premiums they are having to pay the primary mills. It is estimated that between 30% and 50% of the world's primary mills are failing to break even.
Not that Rio had any choice, but the company is right to write down the assets. Even with a slightly more optimistic view of base metal prices for 2013, aluminum is likely to be the laggard, with some analysts such as Barclays even suggesting the aluminum market is "frothy" and more likely to fall back than to rise further in the first half. With an estimated 8-10 million tons of stock overhanging the market and depressing the prospects for sustained price rises, Rio Tinto has few options other than to reflect the continued poor economic prospects for its aluminum business in its accounts.