Alcoa’s Shutdown Of Australian Smelter Will Reduce Production Capacity And Revenues
Alcoa‘s (NYSE:AA) has announced that it is permanently closing down the Point Henry aluminum smelter and two rolling mills in Australia. The smelter will close in August and the rolling mills by the end of 2014. According to the company, the 50-year old smelter was a small operation that had no chance of becoming financially viable going forward. The two rolling mills serve the domestic and Asian can sheet markets which have been impacted by excess capacity.
The latest shutdown will reduce Alcoa’s smelting capacity by 190,000 tonnes, in addition to the huge capacity already lying idle due to lack of demand and an unfavorable pricing environment. The company had announced a review of 460,000 tonnes of smelting capacity last year but the Point Henry smelter had been under strategic review even prior to that. [1]
The shutdown will also help Alcoa reach its stated goal of lowering its position on the global aluminum cost curve to the 38th percentile by 2016. While there will be an impact on the company’s sales figures, the net profit may get a slight boost due to a greater reduction in expenses relative to the decrease in revenues.
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Importance Of Aluminum Prices For Alcoa
Alcoa is organized into four business segments: Alumina, which mines bauxite and processes it into the precursor to aluminum; Primary Metals, which smelts aluminum; Flat-rolled Products, which makes sheets used in beverage cans as well as airplane wings and car parts; and Engineered Products and Solutions, which makes aerospace fasteners, turbine blades and truck wheels. While the Flat-rolled and Engineered Products and Solutions divisions produce value-added products and thus generate higher margins, a significant proportion of Alcoa’s revenues still comes from the Alumina and Primary Metals divisions. This makes its earnings highly sensitive to aluminum prices. While the company is trying to reshape its business towards the downstream value-added segments, the structural shift is likely to take time. Till then, its earnings and business strategy will continue to remain sensitive to global aluminum prices.
Unfavorable Aluminum Prices And Reduced Demand
Aluminum prices were on a constant decline in 2013. The price per tonne dropped steadily from $2,100 at the beginning of 2013 to $1,700 towards the end of the year. The situation has been no better in 2014 thus far. [2]
The European debt crisis, slowing Chinese growth and overcapacity in China have contributed to the decline in aluminum demand and its prices over the last few quarters. In addition, the long term expectations for these factors remain largely unchanged, so weakness in prices is expected to persist in the foreseeable future. The only silver lining is that efforts by the Chinese government to reduce overcapacity have resulted in net capacity additions reducing to a trickle. State intervention in the form of subsidies or provision of cheap power encourage smelting capacity addition in China. Another factor that might explain falling prices is the persistently high aluminum inventory relative to demand, which may be keeping a lid on London Metal Exchange (LME) prices for aluminum. While LME prices are not the actual realized prices for Alcoa, they do indicate a broader trend in global aluminum prices.
The aluminum market has been flooded with excess capacity in China and affected by slowing global economic growth. Recent efforts by China’s government to tackle overcapacity have “tempered” net capacity increases to 2.2 million tons after shutting down 2.1 million tons, Rusal said today. [3]
After The Point Henry Shutdown
Once the shutdown is complete, Alcoa will have a total aluminum smelting capacity of 3,760,000 tonnes. Of this 655,000 will be idle. The idle capacity is expected to increase further because of the 460,000 tonnes which were put under review in May 2013, closure or curtailment of 361,000 tonnes has been announced so far. This excludes the shutdown of Point Henry because it had already been under review since February 2012.
Alcoa is expected to make further progress towards its target of lowering its position on the global aluminum production cost curve to 38th percentile by 2016. By the end of 2013, the company had reached 43th percentile which represents an 8 point reduction since 2010. [4]
Alcoa will have to record restructuring charges worth $250-270 million after accounting for tax and non-controlling interest. Of this, approximately 60% will be recorded in the first quarter of 2014. In addition, cash costs worth $160 million will be recorded throughout 2014.
We have a Trefis price estimate for Alcoa of $9.
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Notes:- Alcoa to Close Point Henry Aluminum Smelter and Rolling Mills in Australia, Alcoa News Release [↩]
- LME Aluminum Price Graph, LME [↩]
- Alcoa to Close Australian Smelter as Rusal Trims Output, Bloomberg [↩]
- Alcoa Q4 2013 Earnings Presentation, Alcoa Website [↩]