Constraints on aluminium ease

Date: 07/12/1995

By Tim Jones

A WORLDWIDE agreement to cut back over-production of primary aluminium looks set to be dropped at the end of this year, leaving the industry open once again to unfettered market forces.

“We don't think there will be any attempt to keep it going,” admitted an official involved in monitoring the agreement.

The accord, known as a 'memorandum of understanding' (MOU) between the world's largest aluminium producing nations, was signed in January 1994 in response to a sudden and massive upsurge in exports from the former Soviet Union.

As their major consumer, the Soviet armaments industry, went into a nose-dive at the end of the 1980s, aluminium producers in the Commonwealth of Independent States sought to export their surplus to the west.

Imports of low-priced aluminium soared while, at the same time, the onset of recession in the western economies choked off consumption.

“The situation became alarming in 1992 and almost distorted in 1993 with an extreme oversupply,” said a report from the European Aluminium Association (EAA).

With the price plunging and aluminium stocks soaring to a record high of 2.4 million tonnes, producers decided they needed to act together and persuaded their governments to negotiate a capacity-cutting treaty.

The agreement was not struck easily. The Russian side was reluctant to cut back its production without guarantees of similar cuts in the west and aid to revitalise its industry.

However, western producers could not give specific undertakings on capacity cuts for fear of breaking anti-trust laws.

Under the MOU, Russia agreed to cut capacity by 500,000 tonnes, while other producers - the EU, the US, Norway, Australia and Canada - gave an 'understanding' that they would reduce capacity by equivalent amounts. In return for their capacity cuts, Russian industry received aid from the west to upgrade production facilities and the quality of the metals.

The wording from the western side was kept deliberately vague because consumer groups and the US Justice Department were watching the talks closely for signs of cartel-like behaviour. Nevertheless, western producers announced capacity closure amounting to close to 900,000 tonnes.

The MOU seems to have been a success in a short time.

After the agreement was signed, officials from the signatory countries met again in Canberra in July 1994 to assess the situation in the markets. Another meeting was scheduled for the end of the year in Oslo, but the improvement in the market caused governments to cancel it.

In 1994, western Europe produced 3.14 million tonnes of primary aluminium, a reduction of more than 5&percent; on 1993 levels. At the same time, consumption was up 12.9&percent; at 5.14 million tonnes and imports were required to meet the needs of consumers.

“Since demand picked up in 1994, the situation has eased and is now turning around in 1995,” reported the EAA.

World stocks of aluminium have dropped to half-a-million from more than twice that at the height of the crisis in the sector. “Stocks are low, prices are good and there is no intention to call another meeting,” said the official. “If they do, it will just be to say goodbye.”

Production has already started to pick up in the west, although companies have made it clear that the idle capacity will not come back on stream until they can judge how demand is shaping up.

Russians, for their part, have stressed that they intend to restart production next year once the MOU expires. Technical aid from the west does seem to have helped integrate Russian industry into the world market over the past two years but output has still not been cut back as much as had been hoped when the MOU was signed.

In 1994, production in the Commonwealth of Independent States fell only 140,000 tonnes while its exports rose.

All producers will be careful not to misread the signs of increased consumption. Even when the price of aluminium rocketed at the beginning of this year to 1,500 ecu per tonne, they did not all jump into production.

Some remain sceptical about the automatic effects of the MOU in reining in output and pushing up the price of the metal. The emergence of speculators in the metals futures market certainly helped accelerate the price movements at the beginning of the year, when the US 'hedge funds' alone were estimated to have put 1.9 billion ecu into the market.