Aluminum consumer pinch won't prompt U.S. restarts

Aluminum users in the United States are feeling the pinch from tight availability, but idled smelters there will not be lured out of semi-retirement while stocks of the metal climb and it can be produced more cheaply elsewhere.

U.S. Midwest spot aluminum premiums -- which reflect how tight domestic supplies are -- shot to record highs close to 10 cents a lb earlier this month, fueled by strong domestic demand and bottlenecks at North American warehouses. They have eased somewhat since, but are expected to rise again.

Further significant restarts of the country's aging, high-cost smelters are not justified while already vast inventories of the metal are on the rise again.

Stocks of aluminum -- used in transport and packaging -- in London Metal Exchange (LME) warehouses hit a record high above 4.71 million tonnes on Wednesday.

"There's not a lot of wriggle room for more reactivations (in the U.S.), there's concern that stocks are at all-time highs and expected to rise further," said RBS head of commodity research Nick Moore.

Jorge Vazquez, senior vice president of Harbor Intelligence's Aluminum Intel Unit in Texas said U.S. restarts would likely be limited to 50,000 tonnes at most in the final quarter of 2011 or first quarter next year.

He said this would give a total of 725,000 tonnes reopened out of the 1.210 million shut during the global economic downturn after demand and prices fell sharply in late 2008.

A first phase of re-activations included Alcoa (AA.N), which announced in January plans to restart capacity at three idled plants in the first half of this year. Favorable power deals with local power companies played a key part. But more restarts seem unlikely for some time.

"We are observing the market, but have no intention of bringing on more (U.S.) capacity any time soon," Alcoa CEO Klaus Kleinfeld told Reuters this week.

There is more than enough aluminum capacity globally to satisfy demand, particularly in places with cheap power. Power accounts for more than one-third of aluminum production costs.

Companies such as Alcoa have, or are building, projects in the Middle East and Iceland with ready access respectively to gas and hydro-electricity.

"Right now, it might be more economic to produce in Iceland for example and find a way of balancing that by bringing units into North America, rather than operate from North America," said Nick Madden, vice president and chief procurement officer of Novelis Inc, the world's biggest flat-rolled aluminum producer.

"There is specific tightness right now in the North American market that I think is a bit of an aberration," he added.

Novelis, based in Atlanta, Georgia, is a unit of Hindalco (HALC.BO), India's largest aluminum producer.