Rio Tinto's Aluminium Test

When Rio Tinto gets its refunding out of the way and sorts out its relationship with Chinalco and China, it will have to once again confront the reason for its problems: the depressed aluminium industry. Rio's $44 billion takeover of Alcan deepened its involvement in the industry and significantly diluted the quality of its existing high class assets, the Weipa bauxite operations and its alumina business based at Gladstone in Queensland and in several other countries. The debt taken on for the acquisition, plus the credit crunch and then the downturn in demand as the recession swept the world, has meant Rio was exposed at a time when it had falling cashflows and profits and stretching finances. Chinalco offered a deal, and Rio took it, then spent months wriggling in the spotlight until a way out was found: the huge rights issue and deal with BHP Billion on a joint venture with their Western Australian iron ore businesses. Now Rio is trading ex-Chinalco but cum facing up to the hard yards in its weak point heel, aluminium. Rio shares finished up 4.4%, or $2.19 at $51.79 as the rights trading for the fund raising ended. Alcoa, Rio's big US rival and one time Chinalco partner, reports its second half figures in New York on April 7 and will give us the most up to date view of the depressed state of demand for the metal. But a senior Rio executive has already told us the bad news about the metal's outlook. In a little noticed speech in Chile earlier this month Carmine Nappi, a director of industry analysis at Rio, forecast a 12% fall in demand for aluminium in 2009, to 33.5 million tonnes "The market is recovering," Nappi said. "There has been some turning point." U.S. industrial production "will reach a trough in the next month or two" Nappi said. Demand in China started to recover since February and is the only part of the world where it isn't contracting. According to the Bloomberg report, he saw global demand in 2010 rising 16% to 38.7 million tomes. That will still be down on the 2008 peak of 40 million tonnes in the second quarter of last year. The shutdown in aluminium production around the world has help steady the slide in prices, but much depends on China where there are fears the recent up turn in demand and stockpiling might end suddenly in coming months. The London based metal analysts; GFMS said this week that while the aluminium market has arguably the poorest fundamentals of all the base metals, prices have increased by just over 30% since February. LME inventories of aluminium continue to climb and represent around 10 weeks' consumption compared to less than 2 weeks for lead. It said the latest WBMS data suggest that aluminium consumption over the first quarter was down 16.9% year on year at 7.924m tonnes. "Significant declines have been seen in the mature economies of Europe, North America and Japan, while the emerging markets have provided little support. European consumption for aluminium was down by an estimated 33.7% over the first quarter, driven by a 45.7% fall in German demand to 275,700 tonnes. In 2008, Italy was the third largest consumer of aluminium behind Germany and Russia, but consumption has suffered over the first quarter of 2009 with usage down 46% to 141,200 tonnes. In Japan, offtake declined by 31% to 387,000 tonnes. There are at least some positive signs as we move towards Q3. In Japan, although demand remains weak, shipments in April were up 11% from March representing the second consecutive month on month increase - after a 10% month on month rise in March - according to the Japan Aluminium Association. "This at least gives some hope that Japanese shipments might be stabilising," GFMS said in its latest newsletter. However, activity in the downstream sector remains at low levels, highlighted by the fact that April shipments, of 137,718 tonnes, were down 31% year on year. The sharp increase in LME stocks has come about despite strong buying by the Chinese; a feature which can be viewed as bearish from a fundamental standpoint. Over the first four months, Chinese imports have increased 876% year on year to 478,155 tonnes. April imports stood at 362,400 tonnes, up over 2,100% on the figure seen in April 2008 as buyers replenished stockpiles needed for the country's stimulus programme. The monthly figure was also over four times the 85,965 tonnes seen in the previous month. GFMS said that according to the International Aluminium Institute (IAI), global production was down 10.1% over the first four months of 2009. (IAI members account of 80% of global output) "That continued in May where production of 1.973 million tonnes, was 10% under the 2.190 million tonnes in may 2008. "This decline is relatively modest given the size of collapse in demand. In addition, there are fears that the recent spike in prices may encourage a restart of idled capacity despite the ongoing weakness in demand. "Worryingly, production in China rose in April to 892,000 tonnes, from 883,000 tonnes in March, and could rise further in May as new and restarted capacity fires up. Having said this, China has been a considerable contributor to the cuts so far with a 15.9% decline in the first four months of 2009. Elsewhere, the supply response from producers has been limited, with output (excluding China) falling by just 7.2% over the first four months. "In April, daily average primary aluminium output fell to 64,000 tonnes from 65,200 tonnes in March. If China is included, however, the daily rate actually rose in April to 93,800, from 93,700 in March. "The lack of a supply response suggests that the aluminium price is vulnerable to a correction in the summer months," GFMS concluded. source:ibtimes.com.au