LONDON, Jan 23 (Reuters) - Weak demand and price declines for metals in a lacklustre global economy will play a role in pushing aluminium makers to continue cutting production as well as encourage nickel and zinc producers to make cutbacks, albeit on a smaller scale.
Aluminium producers, including Alcoa and Norsk Hydro , have cut global capacity by around 1.3 million tonnes after high power costs, combined with the sharp declines in prices, left around one-third of the industry in the red.
“I would expect that the aluminium market may see this trend (in cutbacks) continuing, though not accelerating, for a period of time. But I don’t see it spreading to other industrial metals in any significant way,” said Stuart Burns of online metals journal MetalMiner.
Rising power costs for the energy-intensive metal played a key role in closures of high-cost operations, some permanently. Power accounts for 30 to 50 percent of the cost of producing aluminium but is a smaller cost component for other metals.
The need for producer action in other metals also may be less acute than feared late last year, when worries grew that the euro zone crisis would spread, leading to a slump in metal demand.
Of the industrial metals, nickel and zinc are also vulnerable to cuts as they face sizeable surpluses, unlike copper, which is set for another year of tight supply.
But their cutbacks may not turn out to be that significant.
On Friday, Russia’s Norilsk Nickel, the world’s biggest producer of nickel and palladium, said it expected to reduce output this year to adapt to a small decline in demand. It said the reduction would be slight.
Higher-cost Chinese producers of nickel pig iron (NPI), a lower grade of nickel used in stainless steel, will bear the brunt of any cuts in that metal, particularly if prices fall to around $17,000 a tonne.
But the pressure on them eased on Friday when the market rose above $20,000 a tonne for the first time since late October. These operations are very price-responsive and can switch back to producing NPI very quickly when prices rise.
China is also eyed as the most likely source for curtailments in zinc, because even the highest-cost western miners can make money unless prices fall to $1,700-1,600 a tonne.
Even then prices for co-product silver could keep them profitable, according to consultancy CRU Group. Zinc traded at around $2,020 on Monday, far above that level.
So far Chinese zinc miners have continued to churn out material, although they have refrained from selling all their concentrates as they wait for better prices.
Of all the metals producers in China, aluminium smelters are the most likely to cut production some time in 2012 because of soft domestic demand and low prices, an analyst at a foreign-invested investment fund in Shanghai said.
“Currently not many aluminium smelters are cutting production, but the pressure of doing so could mount if prices fall,” the analyst said, estimating that such cuts could reduce China’s primary aluminium output by about 5 percent from the December 2011 level.
According to the National Bureau of Statistics, China produced 1.427 million tonnes of primary aluminium last month.
Companies globally are moving to add new low-cost aluminium production capacity, even while cutting back high-cost plants.
“Aluminium got a bit of a boost from the production cuts announced by Norsk Hydro and Alcoa, but those cuts are a drop in the ocean compared with the new capacity that those companies are bringing on stream,” said Citigroup analyst David Wilson.
Alcoa may be shutting 531,000 tpy of capacity in North America and Europe, but it is also due to start up 740,000 tpy of new, cheap capacity in Saudi Arabia next year.
Norsk Hydro’s 50 percent-owned Qatalum plant in Qatar, meanwhile, is set to work at full capacity of 585,000 tpy for the first time this year. At some point the company has plans to double capacity at that operation.
In addition to new capacity, inventories remain at elevated levels, with stocks in LME-registered warehouses at a record above 5 million tonnes .
“While the announced (aluminium) production curtailments are a good start to working off some of the large accumulated supply overhang, we believe production cuts will have to be deeper and last for longer than one year to see a sustained rebalancing of the global market,” Morgan Stanley said in a recent note.
“More specifically, Chinese production growth will need to slow this year and next,” it added.