No aluminium cuts deal, high-cost plants to take pain

LONDON, Feb 4 (Reuters) - The global aluminium market must take further drastic action to battle the rapidly rising mountain of stocks, but an inter-governmental agreement to curb output, like the one implemented in the early 1990s is unlikely. Instead, high-cost operations in North America, Europe and China, the world's top producer of the metal, used in transport and packaging, will have to idle more capacity or shut for good. The possibility of another Memorandum of Understanding (MoU) in aluminium was raised earlier this week by the head of United Company RUSAL, the world's largest producer. [ID:nLV338938] But analysts doubt there will be a repeat of 1994 when governments of major producing countries agreed to big output cuts in response to a glut of material from the former Soviet Union (FSU). They cited hurdles such as legal opposition and logistics because of changes in the shape of the industry. "It's very, very unlikely that you'd have another MoU, major Western producers would be very wary and shy away from it. U.S. authorities would jump on producers there for one for breaching anti-trust laws," said independent consultant Angus MacMillan. Consumers would also voice fierce opposition if their costs were to rise through higher metal prices, bolstered by cutbacks, while demand for their products remained poor, he said. Others said the World Trade Organisation was more powerful than it was in the early 1990s and would also block such a move. Massimo Rossi, senior analyst at CRU Group, thought it would be difficult to get major producers at the same table and then make them agree on a common course of action. Analysts made the point that governments had much closer ties with producers in the early 1990s than they do now, so would hold less sway. Some of those old firms have also disappeared, while the emergence of numerous independent Chinese producers might be a barrier to such an agreement. "In today's environment the case for another MoU is quite weak. You would have to deal with China and its very fragmented production structure, and you would have to bring together big companies like UC Rusal, BHP, Rio, Alcoa, Chalco and the Middle Eastern producers," Rossi said. "It would be a very difficult and lengthy procedure." FLOOD OF METAL The last MoU was prompted by the break-up of the former Soviet Union. Metal flooded to the West as domestic demand, in particular from the arms industry, slumped and exchange stocks jumped to unprecedented levels. London Metal Exchange (LME) aluminium stocks recently surpassed those highs due to a global slump in demand and the placement on warrant of material that already existed but had been tied up in financing deals. LME stocks now stand around a new historic peak at 2.84 million tonnes. Fears that they might reach four million tonnes have highlighted the need for further producer action. But analysts said this would occur through measures at high-cost operations, not through a concerted move by governments and producers. "I expect the market to take care of this," said independent consultant James King. He said small smelters in China, which have mushroomed in recent years, would bear the brunt. China produces around 13.0 million tonnes of aluminium, out of a total 40.0 million tonnes market. MacMillan said some plants in the United States and parts of Europe would close for good. So far producers have announced curtailments totalling around 5.5 million tonnes of annual production capacity. Doubts were cast on the success of the last MoU, when Russia agreed to reduce output by 500,000 tonnes within six months, while the United States, Canada, Norway, Australia and the European Union agreed to a 1.5 to 2.0 million tonnes cut. Analysts said those cutbacks were not fully realised and also that the market was already improving when they were made. Official figures show global primary aluminium output in 1994 was 19.158 million tonnes, down less than 600,000 tonnes from 1993. "It wasn't a huge success. It took so long to get the agreement in place that the market was turning up anyway," King said. (Edited by James Jukwey) Source: Reuters