Reuters: Regulatory News: COLUMN-Lessons from Bosnia for the aluminium market: Andy Home

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COLUMN-Lessons from Bosnia for the aluminium market: Andy Home Jun 7th 2013, 11:44 Fri Jun 7, 2013 7:44am EDT By Andy Home LONDON, June 7 (Reuters) - "Production under these circumstances no longer makes sense." So said Ivo Bradvica, general manager of Bosnian aluminium producer, Aluminij Mostar, in announcing the full curtailment of activities at the 130,000-tonne per year smelter. Aluminij Mostar has been racking up monthly losses of 9.7 million Bosnian marka ($6.5 million) since the start of the year. Last year it lost 65.8 million marka and trimmed output by 12.5 percent in a bid to fend off financial collapse. The local bauxite mines with which it was once integrated have long gone. Local power supplies are scarce and high-cost. The company has been dependent on a tolling agreement with Glencore for many years. Its curtailment is but a drop in the oversupplied 45-million tonne global aluminium market. But it is symptomatic of the pressures facing aluminium smelters everywhere, pressures that are generating a new round of production cutbacks, not least in China, where industry leader Chalco <601600.SS 2600.HK> has announced 380,000 tonnes of curtailments. Aluminij Mostar, though, is also symptomatic of why this market's supply response to price pressures is often so lagging and why excess capacity is likely to remain an issue for many years to come. TOUGH TIMES If the world behaved as economists think it should behave, Aluminij Mostar would have already closed, probably when the London Metal Exchange (LME) aluminium price first started eating into the global cost curve in the back end of 2011. But it didn't, preferring to try and tough it out with at least tacit support from the Bosnian government, even if that support didn't extend to acceding to repeated requests for subsidised power supplies. While a small entity in the global aluminium sector, it's a giant in the local economy. It employs 900 directly and supports a small hub of metal manufacturers, who will now face a highly uncertain future. Its curtailment will be a major setback in a country where unemployment last year was an estimated 28 percent. Aluminij is not only the biggest exporter in the small former Yugoslav republic but is the mainstay of a metals sector that accounts for over half of national output. Underpinning such socio-economic restraints on closure is the historical symbolism of the Mostar plant to a country still struggling with the legacy of the 1990s Yugoslav wars. The complex was repeatedly bombed in April 1992, a direct hit on the power substation finally halting all production. Subsequently occupied by what the company's website () calls "the Serbo-Montenegrin aggressor forces," what was left was then systematically destroyed. It took five years to rebuild the plant and resume aluminium output. Or, as the company proclaims on its website: "Aluminij has risen!" You can start to understand why Aluminij has defied cost-curve economics for so long and why curtailment has been such a painful decision for both management and workers. What's a bombed-out aluminium price to a company that has literally been bombed out? CHINESE PROMISE Aluminij may be an extreme example but it helps explain why so many smelters can defy a price that on paper should put them out of business. Never more so than in China, where local governments have been adept at lending a discreet helping hand to struggling aluminium producers, most visibly in the form of power subsidies. As with Aluminij, these smelters may individually be small from a global perspective but are often mainstays of the local economy and, even more critically, of tax revenues to local governments. Which is why China particularly is burdened by over-production and excess capacity, to the point that the national government has also lent a helping hand, sporadically scooping up unsold metal from its favoured producers via the State Reserves Bureau. On one level Chalco's curtailments are no more than a reflection of the same hard reality that has forced Aluminij Mostar's hand. The company booked a net annual loss of 8.2 billion yuan ($1.3 billion) last year and another net loss of 975 million yuan in the first quarter of this year. By shuttering higher-cost capacity, Chalco is following in the well-worn footsteps of other major players such as Alcoa and UC RUSAL. At another level, though, it is difficult not to see the hand of Beijing, using Chalco to send a broader message to the country's smelters. Chalco was the original industry leader in China's aluminium sector and although its dominance is now greatly diminished, it retains a special status in Beijing's eyes. The hope is that where Chalco leads, others will follow. It is a hope shared by many others in the aluminium market, which is partly why the LME price spiked to a near three-month high on Wednesday shortly after the announcement. But will others follow? History suggests otherwise and right now what Chalco does or doesn't do is unlikely to have much sway on the new generation of smelters starting up in China's northwestern provinces. IDLED OR CLOSED? An even bigger question is how long these Chalco cuts are going to last. The company described them as only "temporary," part of a "flexible" production strategy. Again history has shown that what is cut in China can be reactivated just as soon as the price shows signs of picking up. Amid the string of cutback announcements made since late 2011 only a small amount of capacity has been permanently closed. And some of that, Alcoa's 215,000-tonne per year Tennessee plant for example, had already long been in moth balls. This is the difference between the problem of over-production and the problem of structural excess capacity. Even if the aluminium industry as a whole can curb its current run-rates, without more permanent closures, the amount of excess capacity in the sector will continue to hang over the price of the light metal. Which takes us back to Aluminij Mostar. All production will be closed down starting this month. But is anyone going to physically dismantle a plant so steeped in national history? Not if the company's website is to be believed. "The most recognisable symbol of Aluminij, and its rise from the dead, is the water tower that was destroyed by the enemy forces, and which today stands upright again with its slender outline, like a guardian of the entire smelter who never sleeps, watches over and admonishes - It is here to remain!" Link this Share this Digg this Email Reprints

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