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Alcoa: Aluminium demand will outstrip supply

November 18, 2010

“Aluminium supplies will struggle to meet surging global demand over the next decade, leading to price rises, according to the head of Alcoa, the world’s largest producer of the metal.

Over the past 20 years, aluminium demand grew an average 3.4 per cent a year, made up of 15 per cent annual growth in China and 1 per cent in the rest of the world. Alcoa believes that over the next decade, even with slower demand in China, global demand can grow 6.5 per cent per year, doubling total use by 2020.

Later in the decade, he adds, it is likely to be increasingly difficult to find new high-quality mines to produce bauxite – aluminium ore – and sites for new refineries and smelters.

‘The constraint will not be capital – the money will be there – but the availability of these high-quality assets’ he says.”

Source: Financial Times, November 17 2010

Observations:

  • Aluminium is growing in importance as building material and in parts for transportation because of the low weight characteristics. However, polymers and composites might become available as low cost substitutes, increasing the risk of aluminium investments in the long term.
  • Mr. Kleinfeld, Alcoa’s CEO, is one of the persons in the industry that is most active in commenting on capacity issues in the industry. Last year and early this year he warned for potential overcapacity in the short term, warning for undercapacity in the long term in his latest conversation with the Financial Times.

Implications:

  • Timing of development is going to be the key to success in the bauxite mining industry. The competitive move of building production capacity early will discourage competitors to increase capacity in fear of overcapacity and low prices. However, increasing capacity too early might cause losses in early years of operation. Securing access to potential capacity will be the focus of business development in the next years.
  • The comments of mr. Kleinfeld can be seen in the light of the underperformance of Alcoa’s shareprice. Convincing investors of the long term prospects of the industry is crucial for the executives.

©2010 | Wilfred Visser | thebusinessofmining.com

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