Aluminium output growth slows in August

LONDON, Sept 23 (Reuters) - Global primary aluminium production growth slowed further in August, extending a trend that has been running since May 2008. Western world production was almost static month-on-month, while Chinese production rose only marginally. However, it is what happens next that will be key for the light metal's underlying dynamics. As demand growth deteriorates in line with a slowdown in the global industrial production cycle, any reacceleration in production growth over the fourth quarter of 2008 will add surplus tonnage to a market that is already in tangible oversupply. The latest (preliminary) figures from the International Aluminium Institute (IAI) showed global average daily production inching up to 108,520 tonnes in August from 107,680 tonnes in July but still off June's all-time high of 109.430 tonnes. The year-on-year growth rate slowed to 4.2 percent in August from 5.1 percent in July, while cumulative production growth over the first eight months of this year was 6.7 percent, compared with 12.6 percent last year. NON-CHINA Daily average production outside of China was 70,100 tonnes in August, compared with 70,000 tonnes in July. Production peaked at 70,600 tonnes in April and May, since when it has dropped back and annual growth has slowed to just 2.6 percent. The brakes are being applied in three of the IAI's seven geographical categories. African production improved marginally to 4,710 tonnes per day in August from 4,680 tonnes in July but cumulative production of 1.135 million tonnes in the first eight months of 2008 represented a 6.3-percent year-on-year slide. Lower output in Africa is largely a function of the 120,000-tonne per year cutbacks forced on BHP Billiton's South African smelters by the country's structural power crisis. In Oceania (Australia and New Zealand) production of 1.538 million tonnes in Jan-Aug 2008 was also off the pace of last year's equivalent figure, albeit by just 0.1 percent. That reflects primarily the 10-percent production curtailment, again due to power availability, at the Tiwai Point smelter in New Zealand. North American production, meanwhile, seems to have peaked in May at 16,160 tonnes per day. In August it fell for the third straight month to 15,680 tonnes. Restarts, most notably of the Hannibal smelter in Ohio, have given way to curtailments, the largest of which has been the idling of 120,000 tonnes of annual capacity at the Rockdale plant in Texas. Falling production in these three regions is being compensated for by rising output in Asia (the fire-up of the new 350,000-tonne per year Sohar smelter in Oman), Western Europe (the ramp-up of the 320,000-tonne per year Fjardaal smelter in Iceland) and Eastern Europe (the 170,000-tonne per year expansion of the Irkutsk smelter in Russia). These three projects, together with a gradual return to normal operations by the Anglesey smelter in the United Kingdom after a June 12 fire, should keep non-Chinese production ticking gently higher in the coming months. CHINA But as the largest national producer of the light metal, it ill be China that determines the global pace of primary production growth through the end of this year. China's own production growth has slowed sharply this year to 7.2 percent in August from 34.6 percent in 2007. Power availability has been the main reason for the slowdown with smelters forced to take involuntary cuts in January-February 2008, due to severe winter weather, and again over the summer months, due to peak power usage. Daily average production crept a little higher to 38,390 tonnes in August from 37,680 tonnes in July, according to figures from the China Nonferrous Metals Industry Association, carried by the IAI on its website. But that was still below the recent peak of 39,070 tonnes recorded in June. Power availability issues continued through August, not least because of the prioritisation of supply for the Olympic Games. Things may be about to change, though. The Olympic Games are now over and power availability will improve as temperatures drop. Reuters has reported that a surge of new capacity is poised to enter production over the fourth quarter of this year. As much as 1.5 million tonnes of annual capacity, representing about half the total increase expected this year, is due to fire up in the next couple of months as new projects rush to start generating cash to repay debt. Such a capacity surge is going to pressure an already weak domestic market, characterised by slowing consumption, rising inventory and falling prices. Higher-cost smelters are already seeing their margins squeezed and there is a growing consensus, both inside and outside the country, that such producers will be forced either to trim output or to shut up shop completely. The process has already started, Reuters reporting this morning that Sichuan Aostar Aluminium will close a third of the capacity at a 125,000-tonne-a-year smelter due to poor market conditions. More such announcements are certain to come, but whether they will be enough to offset the impact of new arrivals is highly uncertain. This particular dynamic within China will dictate the pace of any reacceleration in global production growth in the coming months. It also holds the key to the size of the likely global surplus this year.