When Rio Tinto gets its refunding out of the way and sorts out its relationship with Chinalco and China, it will have to once again confront the reason for its problems: the depressed aluminium industry.
Rio’s $44 billion takeover of Alcan deepened its involvement in the industry and significantly diluted the quality of its existing high class assets, the Weipa bauxite operations and its alumina business based at Gladstone in Queensland and in several other countries.
The debt taken on for the acquisition, plus the credit crunch and then the downturn in demand as the recession swept the world, meant Rio was exposed at a time when it had falling cashflows and profits and stretching finances.
Chinalco offered a deal, and Rio took it, then spent months wriggling in the spotlight until a way out was found: the huge rights issue and deal with BHP Billion on a joint venture with their Western Australian iron ore businesses.
Now Rio is trading ex-Chinalco but cum facing up to the hard yards in its weak point, aluminium.
Rio shares finished up 4.4%, or $2.19 at $51.79 as the rights trading for the fund raising ended.
Alcoa, Rio’s big US rival and one time Chinalco partner, reports its second half figures in New York on April 7 and will give us the most up to date view of the depressed state of demand for the metal.
But a senior Rio executive has already told us the bad news about the metal’s outlook.
In a little noticed speech in Chile earlier this month Carmine Nappi, a director of industry analysis at Rio, forecast a 12% fall in demand for aluminium in 2009, to 33.5 million tonnes
“The market is recovering,” Nappi said. “There has been some turning point.”
U.S. industrial production “will reach a trough in the next month or two” Nappi said.
Demand in China started to recover since February and is the only part of the world where it isn’t contracting.
According to the Bloomberg report, he saw global demand in 2010 rising 16% to 38.7 million tomes. That will still be down on the 2008 peak of 40 million tonnes in the second quarter of last year.
The shutdown in aluminium production around the world has help steady the slide in prices, but much depends on China where there are fears the recent up turn in demand and stockpiling might end suddenly in coming months.
The London-based metal analysts; GFMS said this week that while the aluminium market has arguably the poorest fundamentals of all the base metals, prices have increased by just over 30% since February.
LME inventories of aluminium continue to climb and represent around 10 weeks’ consumption compared to less than 2 weeks for lead.
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It said the latest WBMS data suggest that aluminium consumption over the first quarter was down 16.9% year on year at 7.924m tonnes.
"Significant declines have been seen in the mature economies of Europe, North America and Japan, while the emerging markets have provided little support.
European consumption for aluminium was down by an estimated 33.7% over the first quarter, driven by a 45.7% fall in German demand to 275,700 tonnes.
In 2008, Italy was the third largest consumer of aluminium behind Germany and Russia, but consumption has suffered over the first quarter of 2009 with usage down
