Rio Tinto has given a cautious outlook for its strained aluminium division, which is where the company expanded in 2007 by buying Alcan, took on billions of debt, and has been in recovery mode ever since.
The company said yesterday in a series of presentations in Canada (and released to the ASX) that it is maintaining a tough approach to costs, capital spending, along with a very conservative outlook for the metal in world markets.
In short, it’s hack, slash, not spend, spend, with the approach being to keep the businesses existing assets operating at whatever levels, with a minimum of new capex.
This is based on an outlook that sees upside in China, but also uncertainty, with fears of a double dip slump in demand in the next year or so.
Rio said that it is looking to cut capital spending by 15% at its Alcan aluminum unit next year as the outlook for a recovery in demand remains mixed.
Rio Tinto Alcan is seeking to reduce so-called sustaining capital spending to $500 million in 2010, from a forecast $586 million in 2009.
The company said it would be maintaining a tight hold on growth capital in 2010 with further reductions compared to 2009.
It said it was "mindful of retaining the capability to efficiently run and grow the business when markets recover".
The company is studying its budget for growth capital spending for next year and is forecasting expenditure of $1.1 billion this year for all of 2009.
Working capital initiatives and reductions in growth and sustaining capital expenditures have improved cash flow this year so far by US$1.4 billion compared to 2008.
But according to industry analysts, the supply of aluminum will again exceed demand this year and in 2010.
That is important to Rio, as it is still one of the group’s two major businesses, along with iron ore.
Carmine Nappi, Rio Alcan’s head of industry analysis said in her presentation that “for the time being, the recovery signs in aluminum main end-use markets are still mixed.
"We remain cautious because some headwinds are also at work.
"Our base case is for 4.1% growth in aluminium demand over the next two decades."
She said the current energy surplus in China is expected to be temporary with increasing competition for energy in China from residential and transportation sectors.
"Between March (10.4Mtpa) and July (12.8Mtpa) Chinese production increased 2.4Mtpa on restarts and commissioning of new capacity
"Based on CRU – Quarterly Review capacity estimates for China, this would imply a latent capacity of about 6.8Mtpa in July 2009 or an utilisation rate of 65%," she said.
(That’s the Commodity Research Bureau of London.)
Ms Nappi warned that the impact of the overhang of unsold metal could see a possible "W-shaped scenario where growth returns for a few quarters before petering out once more.
“This would slow down aluminum shipments and make additional contributions to an already high stock level.”
In a separate announcement, Rio also said yesterday that it had completed the sale of its Corumbá iron ore mine in Brazil and the associated river logistics operations to Vale S.A. for a cash consideration of US$750 million.
Rio announced the sale of Corumbá in late January as it struggled with a crushing debt burden, falling revenues and took the Chinalco option (now discarded).
The sale was part of a larger transaction that included the Potasio Rio Colorado potash project in Argentina and the Regina exploration assets in Canada. The potash transaction closed in February for a cash consideration of US$850 million.
"Over the last 18 months, Rio Tinto has announced asset sales of US$6.6 billion including the Corumbá and potash transaction.
"In addition, Rio Tinto has received a binding offer from Amcor for US$2.025 billion for Alcan Packaging global pharmaceuticals, global tobacco, food Europe and food Asia divisions.
"During 2008, Rio Tinto announced divestments comprising the Greens Creek mine in Alaska for US$750 million, its interest in the Cortez operation in Nevada for US$1.695 billion and the Kintyre uranium project in Western Australia for US$495 million.
"Announced transactions in 2009 comprise the Group’s interest in the Ningxia aluminium smelter in China for US$125 million, its Jacobs Ranch coal mine in the United States for US$761 million, Alcan Packaging Food Americas to Bemis Inc for US$1.2 billion and 56 per cent of the Alcan Engineered Products cable division to Platinum Equity for an undisclosed amount," Rio said in its statement.
Rio shares closed down 31 cents at $60.69.
