Alcoa's potential output cuts could lead others to follow suit

Possible aluminum cutbacks Alcoa announced last week are "a potential positive" for the company and could lead other producers to follow suit, an analyst said Monday.

The US aluminum major said Wednesday it plans to review 460,000 mt/year of its aluminum smelting capacity over the next 15 months for possible curtailment to maintain the company's competitiveness. It said aluminum prices have fallen more than 33% since their 2011 peak.

"We believe Alcoa's announcement ... that it is reviewing smelter capacity for closure is a potential positive for Alcoa and for other aluminum producers such as Alumina Limited, Century Aluminum, and Noranda," equity researcher Davenport said Monday. "This action will lower costs for Alcoa (with improved earnings and cash flows), but also could lead to higher LME prices that would benefit all aluminum producers."

But, Davenport said it believes "any market impact will occur in 2014 after capacity has been taken out." In addition, it said Alcoa's "actions could inspire other producers to curtail production -- a move that could significantly tighten the supply/demand balance over the next two years and would lead to higher LME prices in our view."

Davenport noted that producers have threatened to curtail nearly 2 million mt of capacity over the past two years, but have implemented less than half of those cuts. "To date, most smelters have been able to extract power concessions to avert curtailment," it said.

Aluminum prices have fallen 33%, or nearly $1,000/mt, from their 2011 peak, to $1,830/mt (83 cents/lb) Monday.

Davenport said Alcoa's announcement, coupled with Rusal's announcement of 300,000 mt in cuts from earlier this year, "could be the start of the first meaningful wave of production cuts since 2008-2009.

"It is possible, in our view, that action by an industry leader such as Alcoa could spur similar production cuts from other producers," Davenport said. "This has been the pattern in past cycles, meaningful curtailments by one producer have led to a wave of capacity cuts industry-wide, and we believe this cycle will be no different."

Alcoa's move pleased Barclays, which said it was "good to finally hear an aluminum producer is considering taking out capacity given the weak pricing and continuing inventory build. This should not be a surprise, given just how weak aluminum prices are at the moment. By our estimates, about 30-40% of global smelting capacity loses money on a cash cost basis at 80 cents/lb, even after factoring in the hefty premiums received by the producers."

"Unfortunately, 15 months is a very long time, and in our view it is unlikely this review will have any impact on near-term supply/demand, given the timeline and the lack of visibility on actual closures at this point," Barclays said.

Alcoa said the review will include facilities across its system "and will focus on higher-cost plants and plants that have long-term risk due to factors such as energy costs or regulatory uncertainty."