Tags: Alcoa | China | aluminum | industry

When a 127-Year-Old US Industry Collapses Under China's Weight

When a 127-Year-Old US Industry Collapses Under China's Weight
(Illustration: Dollar Photo Club/Rob Williams)

Tuesday, 03 November 2015 02:46 PM

Alcoa Inc.’s move to cut back on aluminum making is just the latest sign of a regime change.

For 127 years, New York-based Alcoa Inc. has been churning out the lightweight metal used in everything from beverage cans to airplanes, once making it a symbol of U.S. industrial might. Now, with prices languishing near six-year lows the company is reducing output in a move that will wipe out almost a third of domestic operating capacity, Harbor Intelligence estimates. If prices don’t recover, the researcher predicts that almost all the smelting plants in the country will shutter by next year.

While that’s a big deal for the U.S. industry and the people it employs, it doesn’t mean much for global supplies. Alcoa’s decision to eliminate 503,000 metric tons of smelting capacity accounts for about 31 percent of the U.S.’s total for primary aluminum, but less than one percent of the global total, according to Harbor. For more than a decade, output has been moving to where it’s cheaper to produce, in Russia, the Middle East and China, which now dominates. A global glut has driven prices down by 27 percent in the past year, rendering American operations unprofitable and accelerating the pace of the industry’s demise.

“You’ve seen a fair clip of closures in the U.S., that is just unfortunate, but a development that’s very difficult to change,” Michael Widmer, head of metal markets research at Bank of America Corp. in London, said in a telephone interview. “It means you’ll just have to purchase from somewhere else.”

That’s exactly what Jay Armstrong, the president of Trialco Inc. in Chicago Heights, Illinois, is doing. The company, which turns aluminum into finished manufactured products, now buys about 80 percent of the supplies it turns into car wheels from overseas. That’s up from 40 percent five years ago, he said.

“It’s not the kind of business where we’re going to pay more and buy all American,” Armstrong said in a telephone interview. “It’s too competitive a business to do that.”

Overseas Advantage

Aluminum is down 19 percent this year to $1,501 a metric on the London Metal Exchange, the benchmark bourse. The metal touched $1,460 last week, the lowest since 2009, and most American smelters can’t make money when prices are near $1,500 or below, Austin, Texas-based Harbor estimates. Plants overseas usually have the advantage of lower labor costs, cheaper energy expenses and weaker domestic currencies that favor exports to the U.S.

While output has been moving abroad for some time, the game changer in the past year has been the domination of China, where ballooning output has compounded a global surplus and driven prices so low that Bank of America estimates more than 50 percent of producers globally lose money. Smelters in the Asian country are still profitable, helped by higher physical premiums in the region.

Still, not all U.S. smelters will benefit from closing down. Citigroup Inc. says some domestic operations have long-term energy contracts that they will have to pay regardless, so some are better off making aluminum than simply paying the energy bill. Some plants are also “well placed cost-wise” because of access to hydro power, said David Wilson, an analyst at Citigroup in London.

“You have to be losing a lot of money to make it worth while to effectively shut down,” Wilson said in a telephone interview.

 

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Alcoa Inc.'s move to cut back on aluminum making is just the latest sign of a regime change.
Alcoa, China, aluminum, industry
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2015-46-03
Tuesday, 03 November 2015 02:46 PM
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