The global aluminum industry currently finds itself in a large crisis. Over the past years large aluminum players have seen a heavy drop in their profits and market value. A new research from Boston Consulting Group (BCG) shows that the largest part of the poor market situation can be reduced to one single cause: overcapacity, with China playing the negative role.
Over the past five years the aluminum market has been hit by a large overcapacity. Between 2007 and 2011 demand grew by nearly 5 million metric tons (MMT), yet supply rose by a much larger amount (>10 MMT), and as a result a large overcapacity has been created. In addition, the overcapacity has occurred in particular in areas outside China, markets that have been impacted relatively highly by the crisis. In 2011, China consumed 94% of its aluminum production, while in comparison the rest of the world was left with an overcapacity of at least 20%.
“Our analyses show that the crisis of the industry cannot be ascribed to an unsuspected drop in ask as a consequence of the global economic downfall or sudden changes in the chain of values” says Thomas Bradtke, partner at BCG. “The crisis arose on the bid side of the market, driven by China’s strategy to heighten its productivity capacity of primary aluminum. Manufacturers did not have their strategies prepared fast enough en because of this they could not implement their measures quickly enough.
Time for action
The strategy advisory firm warns Western aluminum manufacturers that if they do not undertake action, they will find themselves with an even larger problem. In the coming 4 years China is expected to increase its production by 30% to 40%, putting even more pressure on global markets. Up to 10% of that supply will end up on the global market. Outside of China, the consumption % will continue to fall, to approximately 73% - 75%.
The consultants naturally have an advice for CEO’s of aluminum companies. In the report “The Aluminum Industry CEO Agenda 2013-2015″ BCG lays out 10 recommendations, focused at two-levels: an industry-level and company-level. Industry focused recommendations include increasing economies of scale through mergers/acquisitions and achieving more regulatory support from governing bodies through better lobbying. At a company-level BCG recommends firms to paying more attention to the three critical facets of operational management: operational and general costs, management of large projects and commercial activities.