Analysis: Aluminum traders to producers: Cut like it's 1994

To find a precedent for the deep, lasting output cuts that aluminum producers must make to put a floor under prices, traders are looking a lot further back than the last recession.

Three years ago, with the global economy convulsing in the throes of a serious recession, smelters worldwide started cutting back production -- temporarily. As prices quickly rebounded, nearly doubling within a year, those companies were just as quick to fire up their furnaces again.

With the overhang of high inventories and a 28-percent drop in prices since May last year, they're responding again, with Pittsburgh-based Alcoa announcing on Thursday plans to shut down 12 percent of its capacity, some of it permanently.

But traders may not be so readily appeased as three years ago. Many say that much deeper, longer-lasting cuts -- more akin to the post-Soviet government pact of the mid-1990s -- will be required in order to rebalance a market.

"We believe that disciplined action by the industry is required to reduce the overhang that exists," analysts at Dahlman Rose & Co said on Friday.

They said Alcoa's action would be a wake-up call, with further cuts likely to come from relatively higher-cost producers in China, which represents some 40 percent of global capacity.

Alcoa's action appeared to mark a step in the right direction. Some 291,000 tons of annual capacity that it had idled in 2009 will now be shuttered completely, removing the threat of a quick restart that could sink the market once again. It will also curtail another 240,000 tons of annual capacity in production at undisclosed locations. The closures equate to just over 1 percent of the 46-million-tonne per year market.