Aluminium, an old-fashioned boom-to-bust story
By Andy Home
Thomson Reuters
Thursday, December 18, 2008
LONDON, Dec 18 (Reuters) - No industrial metal better epitomises the bursting of the commodities price bubble than aluminium.
Even by the brutal standards of the cross-commodities rout that has taken place since September, aluminium is an extreme example of old-fashioned boom and bust.
And it is Century Aluminum's misfortune that it has managed to capture almost perfectly the return from new to old paradigm market dynamics.
BOOM
Back in July the U.S. producer announced it was buying back its entire hedging program from Swiss trade house Glencore, both counterparty to and major shareholder in Century.
The size of the buy-back was massive, totalling 1.27 million tonnes of aluminium in futures positions stretching out to the end of 2015.
The total cost to Century was $1.709 billion, comprising $225 mln in cash, $505.2 mln in deferred payment and $978.4 million in convertible preferred stock.
Century officials, led by Logan W. Kruger, President and Chief Executive Officer, explained the decision by pointing to the then strength of the aluminium market.
In July prices all along the aluminium forward curve were above $3,000 per tonne. By comparison Century's forward sales hedges were priced in the mid $1,600s.
Kruger told analysts on a conference call to discuss the buy-back: "It has been difficult for me to watch us receive a price for 30 percent of our production capacity that is roughly half the current market price."
Nor were Kruger and other Century officials in any doubt as to which way prices were going to go. Noting that high energy prices and rising capital costs had lifted the marginal cost of aluminium production to $2,700, Kruger said: "The market will not go straight up but we believe the trend will be strong."
AND BUST
Just five months later and the LME three-month aluminium price has slumped to five-year lows beneath $1,500 per tonne, well below the price band of Century's hedging program that was bought back in July.
Yesterday Century made another announcement.
It said it is immediately mothballing a 42,480-tonne per year potline at its 170,000-tonne Ravenswood aluminium smelter in West Virginia.
It has also issued a statutory 60-day WARN (Worker Adjustment and Retraining Notification Act) notice to Ravenswood employees that it will mothball the entire plant from February 15, 2009 unless market conditions improve.
"These are economic decisions based on the global economic crisis and the unprecedented decline in aluminum prices," said Ravenswood plant manager Jim Chapman.
"We are experiencing significant losses at the current aluminum price. The potline curtailment will allow us to immediately reduce our cash losses while we work diligently over the next 60 days with suppliers, customers, employees and government officials to explore all avenues for improving plant economics and maintaining operations."
Century also operates the 244,000-tonne per year Hawesville smelter in Kentucky and the 260,000-tonne per year Grundartangi smelter in Iceland. A second 250,000-tonne per year Icelandic smelter is due to produce first metal in 2010.
PAYING THE PRICE
It is maybe a little unfair to single out Century Aluminum for being caught out by aluminium's dramatic fall from grace.
Century was not alone in believing that the future for the light metal was a bright one.
Based on exuberant Chinese consumption growth projections many other producers were investing in new production capacity or scouring the world for potential sources of cheap reliable power to build greenfield smelters.
The strength of the forward price curve was taken as evidence that rising power input costs had shifted the entire global aluminium production cost curve permanently upwards, heralding significantly higher prices for the metal.
With the likes of Goldman Sachs forecasting oil prices could spike up to $200 per barrel, no-one, it seems, wondered what would happen if the reverse happened and energy prices reverted to historically more "normal" levels.
Nor did the aluminium industry anticipate the collapse of the global credit markets, which has impacted the light metal more than any other industrial metal.
That's because all along aluminium was hiding a little secret: huge off-market stocks that were being privately financed.
An inability to roll over such financing arrangements has seen this hidden stock move onto market.
LME stocks are rocketing.
On Tuesday just over 100,000 tonnes were warranted, lifting the headline figure above the 2 million tonne level. As with previous surges, much of the metal that "arrived" was merely relocating from the off-market to the visible sphere.
It is this massive build in inventory that is keeping aluminium prices locked in a downward trajectory.
Most of the other LME metals have shown signs of stabilising in recent weeks. Some such as nickel and zinc have even enjoyed brief short-covering rallies. Aluminium, by contrast, continues its remorseless descent.
No new paradigm for the aluminium market then, just a good old boom-and-bust commodities story. Century is paying a very public price for confusing the two. It will surely not be the only one in the aluminium industry.
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