Rusal shelves plans for aluminum smelter in Siberia

The aluminum industry plans to cut output again this year as producers seek to reduce excess capacity amid falling prices.

United Co. Rusal PLC on Friday shelved plans to build a high-tech smelter in Siberia that would have created 3,000 jobs and been one of the company's key assets in the region. The world's largest aluminum producer said it would put on hold its Taishet smelter in Siberia's Irukutsh area, with an annual capacity of 750,000 metric tons, citing unfavorable market conditions and an effort to rationalize capacity.

The Russian company also reported that its net loss for last year deepened to $3.2 billion. That included $1.92 billion in impairment and restructuring charges, in part related to the Taishet project. Rusal reported a net loss of $528 million in 2012.

The company cut its aluminum production by 7.6%, or 316,000 tons, last year and said it expected to mothball 650,000 tons of inefficient annual capacity this year.

Aluminum is used in a range of applications, including the automotive and construction industries. Prices on the London Metal Exchange have slipped 3.3% since the start of this year and more than 16% since the start of last year because of sluggish demand and increased supplies.

Rusal isn't the only company facing what Goldman Sachs said was "crunchtime for aluminum." Goldman Sachs said high-cost producers, particularly in China, will face pressure to reduce production. The investment bank estimated that about half China's aluminum output, equivalent to a quarter of global supply, is produced at a loss.

Aluminum prices in China, the world's biggest consumer of industrial metals, have fallen 10% since the start of the year, reflecting increased capacity at low-cost smelters in the country.

U.S.-based Alcoa Inc. AA -0.87% last month said its Point Henry aluminum smelter, a joint venture with Australia's Alumina Ltd. AWC.AU -0.42% , in Geelong, Victoria, will close in August. Alcoa also will close another mill in Geelong and one in Sydney by year-end. The company on Friday announced cutbacks in Brazil.

Aluminum demand is expected to increase 7.6% this year to 55.35 million tons, according to Goldman Sachs. That would cut the expected annual surplus to 198,000 metric tons from the bank's estimate of 546,000 tons for last year.

Smelter closures are expected to help reduce the surplus. About 3 million metric tons of aluminum production is expected to be shut down this year in China and 1.2 million tons is forecast to be curtailed elsewhere, said Elena Ivanova, Rusal's director of corporate finance.

"We believe that continual aluminum-capacity curtailment and consumption growth will significantly increase the balance in 2014 and 2015," Ms. Ivanova told reporters.

China's National Development and Reform Commission late last year said it would charge inefficient smelters more than efficient ones for electricity to cut surplus capacity. Electricity accounts for around two-fifths of the cost producing aluminum, so even small changes in electricity prices can affect earnings.

Analysts were skeptical of the move, though, because local governments have thwarted previous efforts by the central government to cut output, often by offering subsidies or cheap electricity.

The hope that the aluminum industry will turn the corner depends largely on how deeply China cuts production. "Outside of global demand risks, the main risk to our constructive medium-term view on aluminum remains how much support Chinese smelters will receive in the coming months," Goldman Sachs said.

The automobile industry could provide a lifeline for the beleaguered aluminum industry. Ford Motor Co. F +1.31% is planning to release a new vehicle with an all-aluminum body, while General Motors Co. GM +0.64% has accelerated efforts to produce an aluminum pickup truck by late 2018.

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