Alcoa Inc. shareholders eyeing Rio Tinto Ltd.’s large writedown announced Thursday, much of which related to its aluminum business, may be thanking their lucky stars.
Of Rio Tinto’s $14 billion writedown, between $10 billion and $11 billion related to its aluminum business which was greatly expanded with the company’s $38 billion deal to buy U.S. aluminum company Alcan.
Rio Tinto trumped an offer made by U.S. aluminum giant Alcoa in 2007 to buy Alcan, just before the global financial crisis hit and metal markets felt the full force of a synchronised global slowdown.
While Rio may be licking its wounds and hoping that it can draw a line under its aluminum woes, Alcoa in contrast earlier this week said that it swung back to profit in the fourth quarter after cost-cutting efforts and predicted a small uptick in aluminum demand for 2013.
However, neither firm is likely to be able to rely on a rebound in pricing to improve their outlook.
Fitch credit rating agency said that Rio Tinto’s writedown illustrates the weakness of aluminum pricing and market surpluses, a situation it believes will continue for at least the next two years.
Fitch said it estimates between 30% and 50% of producers are failing to break even with high stock levels keeping prices in check and cheap electricity getting harder to find.
“Our conservative assumption is for London Metal Exchange prices to remain broadly flat at $2,100 per tonne in 2013,” said Fitch.
Regarding its view on main sector players, Fitch said that Alcoa’s strong liquidity will likely be enough for it to offset industry weakness.
Australian producers Rio Tinto and BHP Billiton Ltd. are sufficently diverse to offset aluminum price weakness while Aluminum Corporation of China Ltd.’s ratings strength relies on its ownership by the Chinese state, Fitch added.
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