Global Agreement Cuts Aluminum Glut, Boosts Prices
THE collapse of the Soviet military complex was welcomed in the West. But it has meant bad news for aluminum producers around the globe. Russian makers of the light metal, faced with declining demand at home, began exporting their surplus output. World prices dropped sharply. A recent international agreement and stronger demand, however, has boosted prospects for a return to profitability in the industry.
In recent years, American smelters, concentrated here in the hydropower-rich Northwest, have been pummeled along with their global competitors by excess production. Two months ago, with aluminum producers swimming in red ink, trade officials from five nations and the European Union (EU) forged a ``memorandum of understanding'' to cut output and end the glut. Whether the loose accord could reduce worldwide production by 1.5 million metric tons, or about 6 percent, over the next two years remains to be seen. But early results are positive.
``The memorandum of understanding is a definitive move in the right direction,'' says J. Clarence Morrison, a metals analyst with Prudential Securities Inc.
Announced cutbacks are already about two-thirds of the way toward the 1.5-million-ton goal. Russian producers are expected to curtail 500,000 tons of output, with the United States, Canada, Australia, Norway, and the EU splitting the remainder through companies' voluntary, independent actions. US producers have pledged to reduce output by well over 200,000 tons.
Participants are ``just hoping everyone sticks to their part of the agreement,'' says Yvonne Folkerts, spokeswoman for the Aluminum Association, which represents American firms in Washington. But even if successful, the deal does not mean overnight prosperity for the industry, Mr. Morrison cautions.
The good news
The good news, from the aluminum producers standpoint, is that prices have firmed up since the accord, from 47 cents a pound to 59 cents this week. This may not be enough to ensure profitability, however.
Markets also are improving. ``North American demand is very solid,'' and Latin America and much of the Pacific Rim are strong as well, Morrison says. The amount of aluminum used in automobiles is increasing as carmakers work to reduce vehicle weights.
Several countries that did not sign the agreement are expanding production, however. Inventories, now over 7 million tons, remain at least twice as high as needed and are likely to grow despite the accord. Either demand must jump further or ``it's going to take another round of production cutbacks'' to restore the industry to financial health, Morrison says. A recent Prudential Securities report forecasts a balance in the supply and demand of aluminum by mid-1995.
In the meantime, the adjustment means more job losses in the industry, which employs 100,000 people in the US. In the 16 months prior to the January agreement, American companies laid off 5,000 workers and cut 700,000 tons of production.
Northwest hard hit
The Pacific Northwest, where 40 percent of American production is based, will likely take a significant hit. Aluminum Company of America (Alcoa), based in Pittsburgh, plans to slash 100,000 tons of production in Wenatchee, Wash., and Rockdale, Texas. Houston-based Kaiser Aluminum and Chemical Corporation has announced a 40,000-ton cut that could affect plants near Tacoma and Spokane, Wash.
But the agreement appears to have averted a damaging trade conflict. If the talks had failed, American producers were weighing an antidumping lawsuit, alleging unfair pricing by Russia, that could have closed the US market to Russian imports.
As it stands, the deal will aid Russian producers in developing domestic markets and improving their operations.