Income of BHP Billiton’s two aluminium smelters could fall by $500m in half-year to June

The income of diversified miner BHP Billiton’s two aluminium smelters could fall by about $500-million in the half-year ending June, credit solutions provider Coface South Africa risk analyst George Marais tells Mining Weekly. South Africa’s only two primary smelters, controlled by BHP Billiton and situated in Hillside and Bayside, in Richards Bay, have shown successive losses, despite the preferred rates at which BHP Billiton is buying electricity from State-owned power utility Eskom.

“The losses were sustained at an average price of $2 391/t; however, the price fell to a low of $1 945/t in December 2011 and, since then, the metal has been maintaining price levels of around $2 100/t. At BHP Billiton’s production rate of 1.2-million tons a year, this would mean a drop of about $500-million in income in the half-year to end-June,” he explains. BHP Billiton has also reported that it will no longer be investing resources in the production capacity of its smelters and, owing to concurrent losses, could see the plants closing down.

The aluminium-price-linked contracts, which were signed in the early 1990s and are known to favour the world’s largest mining company, have been subjected to ongoing criticism since the load-shedding crisis of 2008.

“This could affect input costs and make the smelters even more costly to maintain, and BHP Billiton is focusing its operations on core business, away from operations that it considers to be unprofitable,” Marais says.

If the BHP Billiton smelters do close down, South Africa will no longer be a primary aluminium producer and the industry would have to import all primary aluminium, causing the balance of trade to suffer a more extensive deficit, he adds. However, another possible outcome to this dilemma could be the buyout of BHP Billiton’s smelters by aluminium major Alcoa Australia, as Alcoa is still expecting demand to grow by 6.5% a year over a ten-year period, he says.

The South African aluminium industry is finding it difficult to compete with international industries, as other countries have bigger markets and have made greater technological advances that enable companies operating in those countries to lower their costs, Marais says.

The flood of aluminium imports facing South Africa’s manufacturers is eroding the value of the R55-billion-a-year aluminium sector.

“South African companies need to be more flexible and look for opportunities in niche markets where their ability is valued,” he suggests.

Further, South African companies should also consider becoming more effective by investing in new equipment and adopting new technology that would drive down costs; however, this requires significant investment and it is difficult for local businesses to justify spending large amounts in the current economic climate, Marais says.