The constant threat of cheaper finished product imports and rising input costs continue to place pressure on the local aluminium sector, asserts credit soloutions provider Coface South Africa risk analyst George Marais.
“South Africa’s reliance on locally produced primary aluminium is soon coming to an end. Holding company and producer of the only localised primary aluminium BHP Billiton reported this year that it will no longer invest resources in the production capacity of its Southern African smelters and, owing to recurring losses, this could see the Richards Bay plant closing down,” he says.
Marais explains that, in the secondary industry, the majority of locally collected scrap is being exported as a result of higher international prices, leaving local scrap smelters underused.
“There is sufficient potential in this industry to be a growing contributor to South Africa’s gross domestic product; however, to maintain this growth, assistance from government is needed.”
He adds that the local aluminium market is also facing the aftereffects of poor global economic growth, largely affecting prices and end-user demand.
“The deteriorating aluminium price and increasing local reliance on imported metal is leading to the migration of the aluminium industry to other regions of the world.
“Aluminium prices fell from their peak at $2 620/t to $1 701/t in 2009. Prices rebounded in 2010, closing at a yearly average of $2 198/t and then increasing further to a yearly average of $2 419/t in 2011.
“Prices this year are estimated to average between $2 400/t and $2 100/t,” he states.
Marais notes that rapid growth in Chinese smelting and refining capacity had led to a significant oversupply, despite the relatively strong stable demand for aluminium. Demand for primary aluminium is projected at 75-million tons a year by 2020. The demand for 2020 has already been produced up to a margin of 80%, leaving 20% unproduced.
“By the end of 2015, low-cost supply would have met the entire aluminium demand forecast. The surplus production capacity coupled with low demand, high stock volumes and lower interest rates will likely keep aluminium prices under pressure until the first half of 2013.
“Adding to this oversupply, the two primary South African smelters, situated in Hillside and Bayside, in Richards Bay, have shown successive losses, despite the preferential rate at which BHP Billiton is buying electricity from State-owned utility Eskom,” Marais explains.
He further adds that one local shortfall is that South Africa has no bauxite ore, the raw mate- rial used to create aluminium. Despite this, South Africa has aluminium smelters.
“The majority of ore for South Africa’s production originates from Australia. The ore is processed into aluminium and then shipped out.
“South Africa has a deep- water port and cheap electricity, making it a prime location for aluminium production. The flood of aluminium product imports facing South Africa’s manufacturers is eroding the value of the R55-billion-a-year local aluminium sector,” says Marais.
He further states that many businesses are now unable to withstand competition from imports, adding that it is difficult for these companies to compete because imports from countries such as China are incentivised by at least 13% by that country’s government.
“Local foundries will have to work towards becoming more competitive and the only way to do this, is to invest in new equipment and adopt advanced technology to drive down costs. But this requires large investment. It is difficult for local businesses to justify large amounts of spending in the current economic climate.
“Other countries have larger markets and have made greater technological advances that enable those companies to lower their costs. The ability of the Far East to produce products effectively and efficiently at a lower cost is another threat to manufacturing industries in the West.“
These countries often incentivise the export of final products, as well as raw materials. This provides greater economies of scale, resulting in more productive industries.
“In China, the total foundry industry is able to produce 40-million tons of casting a year. One foundry alone employs over 375 000 people. South African companies have to be more flexible and look for opportunities in niche markets, where their ability is valued,” he notes.
Growing demand is fuelled largely by the booming Chinese economy, which already consumes one-quarter of the world’s aluminium production and, according to Marais, will consume at least 36% of the world’s aluminium output as early as 2013.
“In addition, the European Union is discussing the possibility of introducing stricter carbon dioxide emission requirements for automobiles, which will boost demand for aluminium. If a motor vehicle weighs less, it requires less power to propel itself and since aluminium is lighter than the traditional steel currently used in motor vehicles, it contributes to emitting less gases when driving.
“Finally, rising prices for substitute metals, such as zinc and copper, stimulate a direct increase in demand for aluminium in the power, transportation and construction sectors in particular,” he states.