NEW YORK (Reuters) - Alcoa Inc (AA.N), the U.S. aluminum giant, plans to cut alumina production in the Atlantic region by 4 percent, becoming the first producer to take measures aimed at reducing oversupply that has lowered prices to around $300 per tonne.
The move follows a slump in prices of alumina, an intermediate ingredient in aluminum production, to levels at which many of the world’s higher-cost refiners are unprofitable.
The company said on Thursday that it would cut annual alumina output by 429,901 tons in the Atlantic region, an area representing about half of its global refining capacity of 19.8 million tonn per year, to bring it more in line with smelter demand for the product made of raw ore bauxite.
Alcoa said it had begun taking some refining capacity offline, but declined to name specific refineries. Potential sites in the Atlantic region could include Jamaica, Suriname, Europe or the United States.
Analysts say production costs at Caribbean refiners are at the higher end of the cost curve, with some refineries in Jamaica estimated to be unprofitable at those price levels.
“Alcoa is taking these steps to avoid aggravating alumina oversupply in the Atlantic region and to enhance the efficiency of our refining system,” Chris Ayers, president of Alcoa’s global primary products division, said in a statement.
The cutbacks equate to intermediate material feed to produce about 220,462 tons of aluminum. For every tonne of aluminum, a smelter would need two tonnes of alumina.
Alcoa said it would trim refining output to bring it more in line with smelting production after announcing in January the company would close or curtail 531,000 tonnes of annual smelting capacity.
While Alcoa is the first producer to announce alumina output cuts, Norwegian group Norsk Hydro (NHY.OL) said last month it would delay building its planned CAP alumina refinery in Brazil due to concerns about short- and medium-term demand for the intermediate material.
Pressure has been mounting for the aluminum industry to reduce capacity because of a global production surplus.
Spot alumina prices in mid-March were around $315 per tonne, down from above $400 at the end of last year, according to traders, who attributed the fall to smelter capacity cutbacks and lower aluminum prices at the London Metal Exchange.
In March, spot alumina prices rose 2 percent in China, the world’s top producer of aluminum and alumina, due to the view that domestic production would fall in the second half of 2012, traders and sources at smelters said.
They said smelters were paying about 2,650 yuan ($420) a tonne for spot alumina in China, compared with below 2,600 yuan in February. Top alumina producer Aluminum Corporation of China Ltd (2600.HK)(601600.SS) has kept its spot prices since November at 2,800 yuan. Spot Australian alumina traded at $315-$320 a tonne on a free-on-board basis, up from $305-$310 in January.
Alcoa has said its goals were to achieve a reduction of 10 percentage points in its position on the global smelting cost curve and shave 7 percentage points off its position on the global refining cost curve by 2015.
Even with oversupply of smelting and refining capacity, analysts expect the aluminum market to improve as global demand increases and have said Alcoa should post quarterly profits for the rest of the year.
Alcoa’s first-quarter results are due on April 10, when it looks set to post its second consecutive quarterly loss.
“The outlook for aluminum is still strong, but Alcoa cannot expect an outstanding year,” said Bridget Freas, an analyst with Morningstar in Chicago, citing weakness in the aluminum price.
Demand for aluminum has been strong in China and other emerging economies, but is only slowly returning to pre-recession levels in the developed world.
Benchmark LME aluminum prices were around $2,110 per tonne on Thursday, off considerably from $2,360 in early March, though still up over 7 percent from December’s 1-1/2-year low.
In January, Alcoa said it would cut its global smelting capacity by 12 percent, or 585,327 annual tons, due to a steep drop in aluminum prices. Of the total, 291,000 came from the permanent closure of capacity idled since 2009 at its Alcoa, Tennessee smelter and in Rockdale, Texas.
Another 264554 tons, or 5 percent, of Alcoa`s smelting capacity will be curtailed in Portovesme, Italy by the end of 2012 and at La Coruña and Aviles, Spain.
Alcoa said on Thursday it had reached agreements with government authorities and unions in Italy and Spain on the curtailments. It has already begun to curtail 99,208 tons at the Spanish smelters, a move due for completion in the first half of 2012.
Separately, Alcoa told Reuters it had been in talks for more than two years with Brazil’s government, asking for suggestions on how to reduce high energy costs.
The company said it was doing its part to reduce operating costs thereby increasing productivity, improving processes, and reducing fixed costs. It said it would defer any decision about reducing output from its two Brazilian smelters for at least two months — the time the government needs to review energy costs.
“This is part of making sure our operations in Brazil are competitive and right now, energy costs are a big impediment to that,” said Libby Archell, director of corporate affairs.
Alcoa shares were off 1.7 percent at $9.64 by 2:30 p.m. EDT (1830 GMT), while the Dow Jones industrial average lost 0.26 percent.
Additional reporting by Ernest Scheyder in New York and Peter Murphy in Brasilia; Editing by Dale Hudson, Gerald E. McCormick and Sofina Mirza-Reid