Alcoa Announces Alumina Refining Capacity Curtailment

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Alcoa (NYSE:AA) has announced the curtailment of 887,000 tons per year of alumina refining capacity at its Suralco refinery in Suriname, as it rationalizes its upstream commodity businesses in response to weak market conditions. [1] Alumina is primarily used as a raw material in the production of aluminum. Given the prevailing weakness in aluminum prices, Alcoa has curtailed a significant proportion of its high-cost aluminum smelting operations. With the reduction in the scale of the company’s aluminum operations, the company is also reducing the scale of its alumina operations, by curtailing high cost refining capacity.

Aluminum Price Graph, Source: LME

  • Aluminum prices have declined over the course of the last twelve months, as indicated by the graph shown above. The decline in prices is largely due to an oversupply situation, as a result of weakness in demand for aluminum in China, the world’s largest consumer of the metal. Slowing Chinese economic growth, which is expected to decline to 6.8% in 2015 from 7.4% in 2014, is primarily responsible for weakness in Chinese demand for aluminum. ((World Economic Outlook July 2015 Update, IMF))
  • Alcoa has reduced its aluminum smelting capacity in response to the decline in aluminum prices. Alcoa’s smelting capacity currently stands at 3.4 million tons per year (MTPY), as compared to 4.04 MTPY at the end of 2013. ((Alcoa to Close Poços Smelter in Brazil, Alcoa News Release))
  • As a result of a decline in Alcoa’s own requirements for alumina, the company has reduced its alumina production and consequently, is curtailing surplus high-cost refining capacity. Alcoa’s alumina production declined 4% year-over-year to 7.9 million tons in the first half of 2015. [2] However, Alcoa’s alumina shipment to third parties are expected to increase in 2015, despite the decline in production, since the company’s own requirements for alumina have declined.

See our forecasts for Alcoa’s third party alumina shipments

See the following links for more information and analysis:

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Notes:
  1. Alcoa to Curtail Remaining Suralco Refining Capacity, Alcoa News Release []
  2. Alcoa’s Q2 2015 10-Q, SEC []