An aluminum supply glut could put downward pressure on prices this year, according to Roy Harvey, president and chief executive officer of Alcoa.
In a presentation during the Bank of America Metals and Mining virtual conference on May 14, Harvey said COVID-19 has created global economic uncertainties for which there’s scant clarity how and when the aluminum market will recover, given the “interplay between supply, demand, and inventories” for the metal.
He elaborated that the industry built up more than 2mn mt of aluminum inventories with which to supply China, but, because of COVID-19-induced shutdowns in the country early this year, it couldn’t use them. Chinese smelters took around 400,000-500,000mt of those inventories off the market by Q2 2020 after they began operating again.
However, even as demand and aluminum consumption recover in China, supply is building up in the rest of the world where large manufacturers, particularly automotive plants, idled operations in response to the pandemic, Harvey said. Despite many of these manufacturers resuming activities next week, Harvey predicted it would take time to rectify the glut.
The situation was made worse for aluminum producers by delayed order shipments, which customers postponed until later in the year when demand for the material recovers. Moreover, producers have had to move some of their high-value products into commodity grade, which, according to Harvey, means the industry is “producing more aluminum than what is needed in the market.”
To overcome the problem, he said it’s necessary for aluminum producers to make a “clear call of action” to reduce their smelting capacities, which could be a relatively slow process because cutting capacity, then ramping up once demand improves, is expensive.
Alcoa has already begun taking these steps. In its Q1 2020 earnings report, the company announced it planned to idle its smelting operations in Ferndale, Washington, citing the plant’s operational losses, which have made it uncompetitive in the current environment.