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By Stuart Burns

Alcoa (NYSE:AA) announced this week it plans to “review 460,000 metric tons of aluminum smelting capacity over the next 15 months for possible curtailment in the face of massive global over-production.”

The announcement is seen as a response to ratings agencies’ downgrading of the firm’s outlook in the wake of low metal prices and Alcoa’s position on the production cost curve. The smelters where the cuts may be implemented are the topic of considerable speculation, but it doesn’t take much to judge that they will be (if they happen) the highest-cost operations.

One is likely to be the Point Henry smelter in Australia, which has 190,000 tons of annual capacity.

A number of Alcoa’s plants in the U.S., Australia and Europe are high-cost and based on old technology, resulting in cash costs higher than current prices, in some cases. Unfortunately, the firm has met heavy political pressure against closures in Europe as governments fight to maintain employment levels. Its operations in Canada are its largest and also cost the least – hence it is being assumed that they will be immune to cuts.

The fact is, though, that while Alcoa is musing over a possible half-million tons of possible cuts, it is bringing on-stream 740,000 tons of new smelting capacity in Saudi Arabia. Overall, the company’s capacity will rise even with the cuts; it will merely move it down the cost curve. This is critical if the firm is to continue to do well in the low-price environment expected for the short to medium term.

It is hoped Alcoa’s lead will be followed by other aluminum producers, an equity analyst at Davenport is quoted by Platts as saying, and in turn that this will lead to more significant global reductions in production.

While that may be the case, the evidence so far is limited.

Norsk Hydro had already announced last year they would close their Kurri Kurri aluminum smelter in New South Wales, Australia, and other plants in Australia, New Zealand, and even the US are said to be closing or under threat without a major move by anyone.

All the producers are tinkering with their highest-cost plants, trying to reduce their average cost of production without significant cuts in their capacity in the hope (not unreasonably) that prices will come back – and when they do, their plants will be back in the black.

It will take more than Alcoa’s or Rusal’s strategic reviews and best intentions of closing capacity to generate any momentum for closures among the majors. Alcoa already has 568,000 metric tons of capacity sitting idle, and few producers have followed them in any sort of meaningful way.

Source: Alcoa's Cost Of Aluminum Production Spurs 'Strategic Review'