Hydro Sees Aluminum Prices Rising on Lack of New Capacity

Jul 23, 2014 6:43 am ET

(Updates with comments on Rio deal in fifth paragraph.)

July 23 (Bloomberg) -- Aluminum prices are set to increase as producers refrain from adding capacity and demand rises, said Norsk Hydro ASA’s outgoing chief executive officer.

“There’s a completely new situation today compared to what it was just a few years ago, with a tremendous oversupply of aluminum,” Svein Richard Brandtzaeg said in an interview in London yesterday. “If you look at the situation now, there’s a clear increasing deficit, and if you look at supply-demand balance outside China today, the deficit is about 1 million tons of aluminum.”

Hydro, which cut about 30 percent of its production after the global financial crisis in 2008, will hold off from restarting output of primary aluminum, the raw form of the metal, until the market becomes more stable, he said. The Oslo- based company is investing instead to increase production of alloys used to make smartphones and lightweight cars.

“We don’t see new projects coming up outside China,” said Brandtzaeg, who is leaving to become CEO of Norwegian nitrogen- fertilizer maker Yara International ASA. “We see some ramp ups in the Middle East but we don’t see new smelters being built in a situation of deficit.”

Soral Plant

Hydro, which on July 3 agreed to acquire the 50 percent stake Rio Tinto Group owns in their joint-venture Soral smelter, isn’t rushing to restart curtailed production at the plant, Brandtzaeg said. It’s currently running at half its annual capacity of 90,000 metric tons, he said.

“Obviously running at half capacity isn’t a long term solution for Soral,” he said. “But we will be very cautious about the timing of when we are going to increase the capacity there because even if the market is improving, we are holding back the capacity to see that positive development in the market becomes more profitable.”

Aluminum for delivery in three months on the London Metal Exchange touched $2,054.75 yesterday, the highest since Feb. 25, 2013. The premiums added to the LME benchmark price to obtain metal in Europe, North America and Asia rose to records this year.

“The sustainability of these record high premiums of more than $400 a ton remains questionable,” Heath Jansen, an analyst at Citigroup Inc., said in a note today.

Rising Demand

Data due tomorrow will show Chinese manufacturing is still expanding, according to analysts surveyed by Bloomberg. Hydro sees demand increasing by 2 percent to 4 percent this year.

“It is a result of a deficit of aluminum outside China and reduction of inventories,” Brandtzaeg said. “We saw that inventories outside China went down from 93 days to 88 days during the quarter and we also saw the LME inventories were reduced from 5.4 million tons to 5.1 million tons. So these are very important price signals.”

An export ban of unprocessed mineral ores by Indonesia has also helped to increase aluminum prices, according to Brandtzaeg. China is seeking alternative sources of bauxite, a raw material used in aluminum production, he said.

The situation throws into questions whether Chinese makers are “really able to maintain their production capacity in a situation where bauxite becomes a scarce resource,” he said.

China’s imports of alumina, a material created using bauxite to produce aluminum, increased “significantly” in the first half because of a lack of the raw material, Brandtzaeg said. “This is another signal in the market that the situation is now in transition.”

Brandtzaeg will remain CEO while Norsk Hydro searches for a replacement and join Yara International in February at the latest.