Rio Tinto might be counting too much on aluminium for its recovery

Optimism that a recovery in profits at Rio Tinto Group’s aluminium division will counter a slump in iron-ore prices and underpin increased investor returns looks misplaced.

When the world’s second-largest mining company reported a 9% dip in underlying profit last month, CEO Sam Walsh touted a turnaround at the unit which emerged from the value-destructive $38bn acquisition of Alcan in 2007. Profit from that business more than doubled to $1.3bn last year.

"Aluminium has grown into a significant contributor to group earnings and cash flows," Mr Walsh told analysts last month. "We’re seeing significant improvement in the aluminium business, and I guess everybody is now seeing it."

The outlook for aluminium is "souring" as a surge in Chinese exports of the lightweight metal used in everything from cars to beer cans threatens a global supply glut, Bank of America Merrill Lynch said last week.

That prospect combined with weaker prices prompted the US’s largest aluminium producer, Alcoa, to say last week it is studying shutting or selling 14% of its global aluminium smelting capacity.

Last year’s rebound in profits at Rio’s aluminium unit was seen as a welcome offset to declining earnings at its much larger iron-ore division, where deepening oversupply cut prices to their lowest in more than five years.

Bank of America last week slashed its forecast for aluminium next year by 16% and by 19% for 2017.

Output will exceed demand by 460,000 metric tonnes this year after a deficit last year, according to Goldman Sachs Group.

Analysts predict premiums buyers pay for faster delivery will decline this year, after climbing about 40% in 2014 in Europe and doubling in the US.

That is not great news for Rio Tinto, already suffering a collapse in the price of iron ore. Rio is spending $4.8bn to boost capacity of its Kitimat aluminium smelter in British Columbia by 50% to 420,000 tonnes a year. It took a $1bn write-down last year on the asset, which is expected to start producing at full output by June.