09 FEBRUARY 2012The Wall Street Journal
Aussie Aluminum Heading for Scrap Heap
Edited by : AL CIRCLE
2 min read
Low metals prices, high costs and the strong Australian dollar are doing to the country's aluminum-smelting industry what a frat boy does to his empty beer can: crushing it.
Australia is the world's fourth-largest producer of refined aluminum and the third-largest exporter, according to Deutsche Bank.
The latest sign of the sector's woes comes from Alcoa. The company said Wednesday it is reviewing the viability of its unprofitable Port Henry smelter, one of two Alcoa smelters in the country that together produce 30% of Australia's total aluminum. A sale or closure could be on the cards.
Alcoa isn't alone. Rio Tinto said in October that it would package up and sell refining and smelting assets in Australia and New Zealand. But who would buy them? Deutsche Bank cut its estimate for the value of Rio's proposed asset sales by 32% this week, from an estimate it provided just four months ago.
The problem for Australia's aluminum producers is that the math no longer adds up.
China, the source of much demand for most commodities, is the world's largest producer of refined aluminum. That has helped keep a lid on prices.
On costs, Australian producers have less room to maneuver than their counterparts elsewhere. For instance, energy is about 30% of smelting costs. Whereas producers in Canada can turn to lower-cost hydroelectric power, Australian producers often rely on coal, which costs more and is subject to new taxes.
The strong Australian dollar is another headache. In the past year, the three-month aluminum price on the London Metal Exchange has fallen 11.5%. Over the same period, the Australian dollar is up 6.3% against the U.S. dollar to near record highs. That pushes up the price of Australian aluminum sold overseas.
There are other pressures. The resources boom is creating cost inflation on labor and equipment in the mining industry. CLSA estimates costs for Australia's mining sector are rising more than 10% a year.
Alcoa's review of Port Henry could be the death knell for the country's smelting industry. It wouldn't be the first manufacturing-related industry to shut up shop in Australia. If the dollar remains strong, it surely won't be the last.
Australia is the world's fourth-largest producer of refined aluminum and the third-largest exporter, according to Deutsche Bank.
The latest sign of the sector's woes comes from Alcoa. The company said Wednesday it is reviewing the viability of its unprofitable Port Henry smelter, one of two Alcoa smelters in the country that together produce 30% of Australia's total aluminum. A sale or closure could be on the cards.
Alcoa isn't alone. Rio Tinto said in October that it would package up and sell refining and smelting assets in Australia and New Zealand. But who would buy them? Deutsche Bank cut its estimate for the value of Rio's proposed asset sales by 32% this week, from an estimate it provided just four months ago.
The problem for Australia's aluminum producers is that the math no longer adds up.
China, the source of much demand for most commodities, is the world's largest producer of refined aluminum. That has helped keep a lid on prices.
On costs, Australian producers have less room to maneuver than their counterparts elsewhere. For instance, energy is about 30% of smelting costs. Whereas producers in Canada can turn to lower-cost hydroelectric power, Australian producers often rely on coal, which costs more and is subject to new taxes.
The strong Australian dollar is another headache. In the past year, the three-month aluminum price on the London Metal Exchange has fallen 11.5%. Over the same period, the Australian dollar is up 6.3% against the U.S. dollar to near record highs. That pushes up the price of Australian aluminum sold overseas.
There are other pressures. The resources boom is creating cost inflation on labor and equipment in the mining industry. CLSA estimates costs for Australia's mining sector are rising more than 10% a year.
Alcoa's review of Port Henry could be the death knell for the country's smelting industry. It wouldn't be the first manufacturing-related industry to shut up shop in Australia. If the dollar remains strong, it surely won't be the last.
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