High-cost smelters face a bleak future

ON THE face of things, the aluminium business is recovering swiftly from a nasty tumble. In 2009 the parlous state of the global economy pushed spot prices for the metal down below $1,500 a tonne. In recent weeks they have risen above $2,200—a 14-month high. Demand is picking up, particularly in India and China. Chinalco, China’s biggest aluminium-maker, which had idled 10% of its capacity, said in December that it would restart it all. Yet according to Michael Widmer of Bank of America Merrill Lynch, an investment bank, aluminium still has “horrible fundamentals”—in part because outfits like Chinalco continue to open smelters.

Those who consider the industry’s recovery superficial point to the 4.5m tonnes of aluminium stashed in warehouses around the world, far above the typical level of around 1m tonnes. Even when the price was near its lows last year, the futures market was anticipating a rebound this year. So speculators could buy stocks on the cheap, sell futures contracts at higher prices, and simply store the metal until the contracts fell due. Much of that metal will come back into circulation in the coming months. …