NEW YORK, Sept 21 (Reuters) – Sinking aluminum prices and a ballooning surplus of the metal have deepened the industry’s worst crisis in years, intensifying pressure on high-cost smelters to embark on another round of production cuts to revive prices from their malaise.
The 25 percent drop since last September has pushed benchmark London Metal Exchange prices to six-year lows, and the unprecedented plunge this year in premiums, surcharges paid for physical delivery, to their lowest in 3-1/2 years are the biggest test for producers’ margins since the 2008 financial crisis.
More than 10 percent of smelting capacity outside of China, or 3.5 million tonnes of production, is running in the red with a combined LME and U.S. premium of $1,800 per tonne, according to Wood Mackenzie data from second-quarter results. On Friday, three-month aluminum was at $1,621, with a U.S. premium of $175 a tonne.
The data illustrates the increasing pain across the sector as producers worry about growing exports from China and production costs such as power remain relatively high.
To have a meaningful impact on prices, producers need to cut capacity by another 1 million to 2 million tonnes, said Ed Meir, an analyst at INTL FCStone.
“It’s been like death by a thousand cuts. Western producers have made cuts here and there, but collectively, it’s not been a lot because China is more than making up for it,” he said.
Alcoa Inc has closed or curtailed 170,000 tonnes of annual output this year as part of its review of 500,000 tonnes of smelting capacity announced in March, and United Co Rusal said in April it might idle 200,000 tonnes of capacity.
Last month, Century Aluminum, controlled by Glencore, announced plans to shutter its 244,000 tonne-per-year Hawesville, Kentucky smelter, blaming Chinese exports and weak prices.
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