Rio Tinto Alcan CEO Jacynthe Cote has publicly acknowledged that the re-launch of the Kitimat smelter, outside Vancouver in Canada, will be delayed until the first half of 2015.
The plant had been scheduled to restart by the end of this year, but cost over-runs and a shortage of skilled workers in the region have caused the delay, according to Ms Cote.
RTA started the refurbishment back in 2011, and is set to spend $3.3 billion on the project. That’s a huge spend for a plant that will produce only 420,000 tonnes of the light metal, once it is at full speed. On a dollars per tonne basis, that puts the capital spend at $7860 per tonne. Even if amortised over 10 years, it means that the plant need to run at less than $1200 per tonne cash cost to be fully economic ($1200 cash costs plus $786 capital charge equals roughly $2000, against today’s metal prices which sit just slightly north of there.)
And in macro terms, an addition of 420,000 tonnes into the global market is a small drop in the ocean. That represents less than a week’s supply.
Many years ago when I got my first job at Alcoa’s Point Henry smelter, I was warned that “once you get aluminium in your veins, you can never get rid of it.” (Later I was told the same thing about Carbon.)
It seems to be the same fate for Tom Albanese. India’s Vedanta Resources, parent company of Vedanta Aluminium, today announced that Tom Albanese, former CEO of Rio Tinto, is to become CEO of that company effective April 1.
Of course, Vedanta Resources isn’t known only for its aluminium smelters. It is a mining company in its own right, while the light metal belongs to its Sterlite subsidiary. But Mr Albanese will find himself dealing with some familiar commodities, such as bauxite, alumina and the light metal itself, as part of his brief. Presumably his brief will also include finding solutions to the roadblocks suffered by Vedanta in terms of bauxite mining and the idled capacity sitting in Jharsuguda. We had the opportunity to visit that plant last year. It brings tears to the eye, to see a smelter of such enormous size, sitting there brand new but boarded up.
Mr Albanese first got aluminium into his system when he steered Rio Tinto through the purchase of the Canadian aluminium company Alcan. That same purchase was the ultimate cause of his departure from Rio Tinto in January last year.
We wish Mr Albanese and our friends at Vedanta every success as he takes the company forward.
China’s Premier Li Keqiang today announced that the 2014 target for GDP growth would be 7.5%.
This is the same target as was set for 2012 and 2013. Against that target, China achieved growth of 7.8% and 7.7% respectively.
It is no simple matter to adjust an economic growth target when you are the second largest economy in the world, and when you are a communist country to boot. One only needs to recall the clamour when previous premier Wen Jiabao took the target down from 8%. Back then, there were rumblings about the ship of state running aground.
On the other hand, today’s announcement that the target remains unchanged will cause as much concern, and with good reason.
Here is a chart from Bloomberg’s Tom Orlik:
As you can see, Premier Wen had it easy in the early part of his time as Premier. He regularly over-achieved his 8%. But the new leadership has no wriggle room here. Any sort of slow down caused by controlling liquidity or spiralling credit growth will cause GDP to slip below the blue line.
And that is one thing that the Communist Party cannot afford to allow to happen. There is no doubt that today’s target was well workshopped before being announced. The leadership would have been confident that the number would be achieved, as they simply cannot afford to be seen to have missed such an important indicator.
Which leads to two possible conclusions, neither of which is palatable for a rebalanced economy. Either the Party will continue the program of “bridges to nowhere” – housing, construction and infrastructure development, or they will do what many commentators think they do already – fudge the numbers to suit.
China still lags the developed world when it comes to “capital stock per head.” That’s the measure of the amount of investment in roads, bridges, rail, and other projects that makes a modern country look modern. China also lags the developed world when it comes to urbanisation, and indeed, Premier Li announced that 100 million more rural dwellers would be moved into cities (though he gave no timeline or budget.) But China does not need these activities to be the driver of GDP. It needs more consumer confidence and domestic consumption. It needs to balance its economic activities.
What’s more, if the 2014 GDP target is achieved by means of infrastructure projects, if these are funded the same way as the previous 5 years, it will only lead to an impossible situation in the credit market.
The alternative is to fudge the numbers, but this too is already wearing on the Chinese people, who see the pronouncements from Beijing with increasing incredulity. Not to mention China’s reputation in the global economic community would also be severely tarnished – not that Beijing cares too much what other people think.
Arguably the most respected “Elder Statesman” in the world of base metals analysis, Jim Lennon is known worldwide for his astute calls on the market as well as his immense knowledge across the spectrum of metals.
It is therefore a huge honour and great pleasure to announce that Jim will be joining us on the stage at the AZ China 4th International Aluminium and Carbon conference. The conference will be held May 5-7 at the Sofitel Hotel, Beijing.
Jim is originally from New Zealand, but has lived in London many years. Jim was with CRU until 2004, when he moved to Macquarie Bank, and ended his tenure at the bank in the role of Chairman of Commodities Research. There aren’t too many analysts and researchers who have risen to that level in an organisation. Jim stepped down from the bank last year, but has kept his skills up by setting up his own company, called Red Door Research.
We are excited at the prospect of having Jim joining us for the conference. He is an outstanding speaker and his knowledge of the industry is first rate.
If you aren’t already registered to attend the conference, be sure to contact our office or go to the AZ China website, or simply click here.
The Jakarta Post has carried a story that Inalum, Indonesia’s only aluminium smelter, is to expand and double its capacity.
Inalum will spend US$1 billion in the process, with the money coming from bond issuance and other debt raising. The money will go towards an incremental upgrade of their existing capacity (taking them from 250kt to 300kt) plus a new line which will produce another 200kt. The plan is to include an alumina refinery and a carbon plant as part of the expansion.
This announcement marks probably the first important project in the primary aluminium world since Ma’aden. We have been telling our clients for some time now, that the world needs new primary capacity soon, if the industry is to be able to sustain continued demand growth. It’s too easy to eye the mountain of legacy metal in and out of LME warehouses and think that the world will be okay for years to come. Apart from Ma’aden, the only other future project around the globe is Kitimat, though one day we might see Alba Line 6. And there is the expansion of Salco in Iran, but that is not a major play.
Unfortunately, it’s not a major contribution. The 250,000t of new metal represents about 4 days supply for the World excluding China.
We at AZ China have been somewhat skeptical about talk of new smelter projects in Indonesia, as the country would need to develop additional power supply and infrastructure to support a new project, not to mention cleaning up its image as a country where corruption is rife. But this project makes a lot of sense – it’s an expansion of existing capacity, being done by an Indonesian company with Government links. The Indonesian government bought the Japanese portion of the equity a couple of years ago.
Interestingly in terms of the long term supply outlook for the world ex China, the announcement says that the project will start construction this year following completion of the feasibility study, with metal becoming available in 2019. That supports our previous mantra that (apart from the two other projects named earlier and now this project), we won’t see any new metal enter the market this decade.
As memories fade of the Winter Olympics, it’s clear that not all Russians were focused on the events at Sochi.
Russian Aluminium company UC Rusal has stuck an agreement with an energy company in Indonesia for a project that will see the Russian company build an alumina refinery in that country. The strategic alliance will also see Rusal undertake exploration for bauxite, with both activities happening in West Kalimantan on the island of Borneo. West Kalimantan sits to the north side of Indonesia and east of Malaysia, with the latter country sharing part of the island. It was also home to a few other bauxite plays, with Indonesian company PT Antam announcing an alumina refinery there last year. Abu Dhabi company Mubadala was reportedly building a plant there as well.
It’s an interesting strategic move by the Russians. The Chinese have been exporting bauxite from Indonesia for the last 4 years or so, but have been prevaricating on building processing capacity. Indonesia brought in a ban on exports of certain ores, including bauxite, with the intention of forcing the Chinese to invest in the country and keep some of the added value at home. But China has been in no rush to outlay capital, since China already has plenty of processing capacity. The last thing the Chinese need is more processing capacity sitting outside their own country and on top of their existing capacity.
But Russia has no such limitation. Rusal can make a nice strategic play here, and become a large scale supplier of alumina to the Chinese market, or to their own smelters in the eastern side of Russia. The project will cost about $6 billion, which is a big burden for a company with a lot of debt already, but it positions Rusal very nicely.
It will be interesting to see whether Rusal calls on the Chinese to supply the technology for the plant. China has in recent years become the world leader at alumina processing technology – hence why they have so much capacity at home – so it might make sense for Rusal to award a contract to a Chinese firm.
The Indonesians have also been talking of a smelter being built on the island, but this would require a much larger commitment from the government for power, roads, and other infrastructure on an island that is still a tropical wilderness.
A warning to Chinese aluminium producers – do not read the announcement from Alcoa this morning about electricity prices in three of their plants, unless you feel like a good cry.
The government of Quebec province in Canada has reached an agreement with Alcoa for electricity prices for the Baie-Comeau, Bécancour and Deschambault plants in that province. The new electricity rate moves from 2.8 cents per kilowatt hour to 3.4 cents. These rates are good to 2036 for Baie-Comeau and to 2030 for the other two plants.
In simple terms, that puts the Alcoa price at roughly one quarter of the price that smelters pay in the heartland of China’s aluminium industry – Henan province and its nearby powerhouse Shandong province. Even the behemoths being built in China’s northwestern provinces struggle to compete with that electricity price, and they have the additional burden of being thousands of kilometres from supply and end-use markets, something that Quebec does not suffer from.
In any case, even if they have better prices today, those smelters in China’s northwest will look at the locked in dates, 16 to 22 years hence, and also cry. Being fuelled by coal, those smelters will be victim to the rise and fall of coal prices. Admittedly, coal prices are softening, but that is not to take away the rent-seeking motives of the provincial governments in Xinjiang, Inner Mongolia and so on.
Thee is no chance that the provincial governments in China’s northwest will take a leaf from their counterparts in Quebec.
TMS is over for another year. As per usual, some people stayed for just a couple of days, others used the Wednesday for golf (M&M were seen with bags of clubs, but weren’t the only ones), while some stayed past the Thursday for a couple of days of R&R.
What to make of the narrative this year? If last year was tough, this year was grim. Aluminium companies had a tough year last year, and were in no mood to hear about price increases. Carbon companies were looking for new business opportunities, but these were almost non-existent. The announcement that Point Henry smelter will close cast a pall over whatever lighter mood there might otherwise have been.
One of the outcomes of a grim year was that numbers were down. The crowd at the BP party was down (based on an eyeball measure), while the Jacobs reception apparently did not crack 600 (though that event was by invitation only.) The Rain CII event seemed a little better attended than other years, though again that judgement is via eyeballing the crowd. But generally, it seemed that there were less people congregating in the lobbies of the TMS hotels.
Certainly there was no reduction in the number of meetings (we had a total of 47), but the big complaint from everybody was that the spread of hotels made things difficult. We had meetings at 6 different hotels, which meant that often we had to finish early in order to allow time for the walk to the next hotel. When you only have one hour per meeting, a reduction of 10-15 minutes is a big loss. Fortunately, we were able to meet most time schedules, though I admit I slept in and was late for one 7am meeting.
And so the juggernaut rolls on, landing again in Orlando Florida, March 15-19 2015. At least we won’t have the problem of so many hotels. Next year it will be a choice of the Swan or the Dolphin. Along with holidaying families and little kids running around in their bathers.
Alcoa today realised a statement announcing that the Point Henry smelter would close by the end of August.
It’s a sad day for the industry, for the folks affected and for the entire city of Geelong where the smelter is based. Not unexpected, and nobody at the plant would have been surprised by the announcement. The only question was, would they retain the cast house and keep the rolling mill alive. We now know the answer is no. The rolling mill would not have survived without cast metal, while the cast house could not survive on its own. There had been some talk about trucking liquid metal up from Portland, but this has not eventuated.
About 1000 people will lose their jobs, not to mention probably up to 10 times that many in support industries – everybody from the contract welding shop to the lunch wagon people.
Geelong has had more than its share of knocks over the years. The Pyramid Building Society Scandal, the loss of International Harvester, Ford, and countless other manufacturing plants in the area.
At a macro level, it had to happen. High production costs, a small local market, the exchange rate and the low metal price all have their share of responsibility. But with no work, much less no manufacturing jobs in the town, locals are going to feel this pain for years to come.
Full disclosure – your blogger spent 13 years at Point Henry, going straight from high school into the Personnel Department as a junior clerk. From there, I worked in the Safety Office, the Industrial Engineering office (building 814E) and the planning office. From there, I spent time running the cast house planning function, before moving to Operations as a foreman and supervisor. So I got to know almost every inch of the plant, from the alumina unloader to the extrusion plant. Alcoa paid to send me to university, which gave me the Bachelor’s degree that I could hang on the wall. I would not be doing what I do now if it had not been for that time in the plant at Point Henry.
The one unusual part of the announcement was that Alcoa has set aside $250 million for site remediation. From what I hear, pot line 1 is slowly sinking into the swamp on which the plant was built, so that’s probably why the budget is so darned big.
Congratulations to Koppers for an excellent event yesterday. The Koppers team, led by Markus Spiess, who in turn was led by his lovely wife, took us to the San Diego Wine and Culinary Centre.
There we discovered that in order to enjoy lunch, we first had to make it. The 30 or so of us were split into 5 teams, and each team was assigned a dish to prepare – an appetiser, a salad and a main course, which Americans call an Entree.
It was the full MasterChef treatment. We were given aprons and a recipe and full range of ingredients. We soon discovered we were also allowed to vary the recipe according to our own ideas.
Without trace of bias, I can report that Team 4′s Linguine and Chicken was an outstanding hit. Compared to team 5′s rendition of the same recipe, we on team 4 were unanimous that our chicken blew the competition away.
A big thanks to Markus and all the folks at Koppers. Ji Yuan and I had a great afternoon.