Analysts Forecast Cuts at Rio Smelters

Rio Tinto PLC is likely to announce further production cutbacks in its aluminum division unless prices for the metal recover substantially, analysts said Wednesday. The cuts will likely be made at some of the high cost smelters Rio acquired with the US$38.1 billion Alcan purchase in 2007, including Tomago in Australia, Dunkirk in Frank, Lynemouth in the U.K. and Sebree in the U.S. Those smelters don't run on cheap hydro-electric power, and have a combined capacity of 1,150 million tons, with Rio Tinto's share of production accounting for 900,000 tons. "We would expect further production cutbacks from Rio Tinto Alcan if aluminum prices do not recover materially, particularly in some of the high cost smelters that came with the Alcan purchase (non-hydro powered smelters)," JPMorgan said in a note. Rio said Tuesday it would delay an expansion at its Yarwun alumina refinery and cut back output at the Weipa mine in Australia in response to falling demand and prices. But the latest curtailment in raw material supply and potential flow on effect for aluminum smelting haven't made much difference to the depressed aluminum market. On the London Metal Exchange Exchange, Aluminum has plummeted by 55% from last year's record high to fall to an eight-year low of $1,279/ton in February. The price slide is undermining the rationale for the Alcan acquisition that transformed Rio into the world's largest supplier of the metal, and also saddled the miner with a huge debt headache. Analysts at Citigroup and AME Economics say another 1.4 million tons to 2 million tons of smelting capacity needs to be taken out of production to balance the heavily oversupplied market. Around the world, 6.7 million tons of cuts have already been announced, including 3.7 million tons outside of China. The decision to make further capacity cutbacks may also pressure Rio's 59%-owned Boyne smelter -- not acquired through Alcan -- with a total 554,000-ton capacity. "Boyne Island and Tomago lie in the lower area of the second quartile, but source their raw materials from refineries which depend on bauxite from the Weipa mine. Therefore, these smelters may feel the flow-on effect from lower output from Weipa," said Michael Dixon, executive general manager at AME. Other base metals have also buckled under the weight of collapsing demand, but aluminum's fundamentals appear to be the worst among industrial metals because of a record overhang of LME stocks of more than 3.5 million tons. Millions of tons of production capacity have been idled but could restart very quickly if prices improve -- as is the case in China, where government electricity subsidies and stockpiling to prop up the industry have improved smelters' production costs and raised domestic prices. AME Mineral Economics said nine of the 22 Rio-owned smelters were in the top half of the cost curve. Based on first-quarter smelter costs, about 50% of the world's aluminum output was unprofitable. "Either the world requires 17 million tons a year less aluminum than we think it needs this year or the price has to go up. Currently we think 80 cents a pound is indicated, rather than current LME prices (of 66 cents/lb)," Mr. Dixon said.