Tighter Aluminum Supply in China Will Spark Investment, Rio Says

(Bloomberg) -- China’s efforts to streamline its aluminum smelting capacity represent a “fundamental change” that will spark fresh investment in the global industry, the head of Rio Tinto Group’s aluminum division says.

“There’s no doubt that we are at a turning point in China when it comes to the aluminum business,” Alf Barrios said Wednesday in a phone interview. “Over the medium and longer term we’re seeing China likely to become more broadly balanced in aluminum instead of being a net supplier.”

New capacity outside China probably will be required within a few years to meet strong global demand, he said, adding that Rio is looking at options to expand its footprint in both smelting and bauxite production.

China, which produces more than half of the world’s aluminum, mounted a campaign last year to shutter idle and unlicensed smelters, and close some plants during winter to curb pollution. In 2017, the country cut 3.8 million tons of capacity from smelters commissioned in the last five years, according to Barrios. Meanwhile, global aluminum stockpiles have been reduced to 10 weeks of supply, compared with 15 weeks in 2011, he said. Rio now expects the latter to approach historical norms of seven or eight weeks by the end of this decade, more quickly than it forecast last year.

Going forward, the company expects growth in global aluminum demand will be 4 percent a year, fueled by strength in the auto industry. Near-term, that means some smelting capacity will likely be brought back online, in China and beyond, but by 2020 that’s unlikely to be sufficient to meet demand, Barrios said.

“We have time to get ready for it, but it’s important we start in earnest understanding what the potential opportunities are and how do they stack up versus each other,” he said.

Canadian operations are at the bottom of the cost curve and are particularly attractive given the premiums being paid for North American aluminum, Barrios said. Rio is dusting off various brownfield investment options, including expansions of the AP60 and Alma smelting operations in Quebec, he said. “There’s not many companies that have the position we have in Canada to capture that growth going forward.”

Also in Quebec, Rio is completing a study on measures that would extend its Vaudreuil alumina refinery beyond 2022 and is considering extending its Arvida smelter to 2025, he said. In Australia, the company is looking at options to further develop reserves at Cape York in Queensland and a possible expansion of its CBG bauxite operations in Guinea.

Asked if U.S. President Donald Trump’s protectionist politics may have pressured China to rein in smelting capacity, Barrios said it was hard to say which factors led to the change, although environmental concerns were clearly part of the decision.

--With assistance from Joe Deaux and David Stringer

To contact the reporter on this story: Danielle Bochove in Toronto at dbochove1@bloomberg.net.

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net, Steven Frank, Joe Richter

©2018 Bloomberg L.P.