This article was written by Martin Hayes. All views and opinions expressed are strictly his own.
Last week, US aluminium giant Alcoa Corp made a plea for the global industry to enact production cuts, or be hit by a rise in inventories, leading, inevitably, to prolonged low prices.
Metal Bulletin’s Andrea Hotter reported that Alcoa’s CEO Roy Harvey, while acknowledging that such cuts were costly financially, and would also result in job losses, said they were needed at this moment in time.
Aluminium producers working together for the common good? It has happened before, however – back in the 1990s, when the industry enacted co-ordinated measures in what was called the MoU (Memorandum of Understanding).
In 2020, the current situation has of course arisen from the global COVID-19 pandemic, which, although not totally unforeseen, given historically previous coronavirus outbreaks such as SARS, was unprecedented in the speed of its spread and impact on the whole world this time.
This is, of course, different looking back in time at the late 1980s and early 1990s, when the aluminium industry faced the unpredicted outcome of the collapse of the Soviet Union. Nevertheless, there are similarities in that inventories rose, and prices fell markedly, as a result of a totally unexpected event, for which no preparations could have been made.
The old Soviet Union was a massive producer of primary aluminium - some 3.5 million tonnes annually - and had been throughout the long years of the Cold War up to the ‘glasnost’ era, with this metal almost entirely consumed by the Russian military machine.
But then Soviet President Gorbachev instituted ‘perestroika’, or re-structuring of the struggling economy, resulting in democratization. And it liberated what had been a classic closed command-based economy.
As a result, markets opened up, while the military demand for aluminium collapsed – estimates vary, but it may have been from over 70% of consumption to less than 10%.
Aided by adept Western brokers and agents, much of what was now excess output was sold to consumers and end-users in the West at a discount – although it was not LME-deliverable, this metal was good quality, such as the A7E grade.
And this displaced aluminium from the major Western smelting firms, which had nowhere to go – apart from being sold as LME cash and delivered into exchange-registered warehouses. Incidentally, the tonnages heading for stores were so large, the LME mandated outside storage at locations, such as Rotterdam, where warehouses were full.
By the mid-1990s, the industry was hurting financially, and after some delicate negotiations, an MoU was agreed in Brussels in 1994, where producers all volunteered to curb output – some 900,000 tonnes of capacity was to be mothballed under the MoU – a significant amount at that time.
This kickstarted prices throughout the year on the LME, aided by speculative buying, leading eventually to complaints from the beverage and automotive sectors that this was, in effect, a cartel.
So how would a repetition of concerted industry restraint play out in 2020/2021?
Such a pact or understanding would probably need to be highly informal, to avoid accusations that a cartel was being created. However, these are highly unprecedented times, and it is noticeable that the EU, for one, is turning a blind eye to member country state-aid for many struggling airlines. Other governments and trade bodies may well follow suit in the case of a MoU Mark Two.
The big unknown is China, however, as this is the country where production continues to grow – as Andrea Hotter noted from 2.7 million tonnes in 2000 to almost 36 million tonnes last year. And according to World Aluminium Organisation data, continues apace.
In March 2020, when China was in the middle of tackling COVID-19 with country-wide lockdowns, production was put at 3.1 million tonnes, which was up on March 2019 levels of 3.04 million tonnes – no curbs there then, and a sign that they aren’t in prospect.
So, the onus will be on Western producers, and the mood music is not promising thus far, if no company steps up, or co-ordinated action does not happen soon.
It might take ever-growing inventories and sustained low prices to force the issue.