Jacynthe Côté Chief executive, Rio Tinto Alcan. Aluminium: A bright future for the metal of tomorrow

Transcription

1 Jacynthe Côté Chief executive, Rio Tinto Alcan Aluminium: A bright future for the metal of tomorrow Metal Bulletin 26 th International Aluminium Conference Paris, 8 September

2 Bonjour, and thank you for that kind introduction. I am pleased to address this important forum and provide Rio Tinto Alcan s perspective on some of the opportunities and challenges facing our industry in these tumultuous times. We ll begin with a brief look at current market conditions. Although I want to be cautious given the current situation, I hope to present a balanced view of the global economy. There have been drastic ups and downs lately, and we ll undoubtedly see more still but they say that if you wait to do anything until you're sure that all is perfect, you'll probably never do much. I will then take a forward-looking view of global aluminium demand and supply, and address the cost structure of the industry. We are poised for remarkable growth as economies-on-the-rise call for considerably more of our light, recyclable, corrosionresistant aluminium products. Our metal will also play a key role in the environmental projects of a more carbon-constrained world. Lastly, I would like to share some insights into Rio Tinto Alcan s strategic priorities, which we believe differentiate us and build on our leadership position. Aluminium has a solid future and a strong long-term outlook. So does Rio Tinto Alcan. To begin, however, we are unfortunately faced with a glass that s half empty. Only a month ago, Washington struggled with raising the debt ceiling. This rocked markets and prompted Standard & Poor s to cut the U.S. government s credit rating. Soon after, we learned that U.S. GDP expanded at an annual rate of only 1% in the second quarter of 2011 much lower than expected. Last Friday, the Bureau of Labour Statistics released data showing that, for the first time since February 1945, the U.S. government reported a net job change of zero. Stock markets around the world felt the impact. Indexes in Asia and Europe fell, and the Dow Jones Industrial Average lost 253 points. Gold, which tends to rise in the face of pessimism and insecurity, gained $48. Sovereign debt in Europe also remains high on the world s agenda, with the lynchpin economies of Germany and France suffering in the second quarter. A lack of jobs for young people has created what the Wall Street Journal is calling a lost generation. Youth unemployment hovers above 20% for the European Union, and rises to 38.5% in Greece and more than 45% in Spain. 2

3 Executives from the International Monetary Fund and World Bank remind us of the need for a delicate balance one to help governments in both the U.S. and Europe reduce debt levels without cutting spending too aggressively and endangering economic growth. Experts say that even if we don't relapse towards recession, economic expansion will be modest and gradual in these pivotal regions. Governments worldwide invested a great deal in stimulus funding to address the global financial crisis. Growth continues to stall, but most OECD countries can no longer support this type of investment, and monetary tools are no longer as flexible. Economic incentives will be humble, and are expected to be replaced with tightened budgets. Public spending levels and priorities will differ, but President Obama s imminent announcement about plans to jump-start the American economy will carry great weight. Fortunately, a glass that s half empty is also half full. World leaders will continue their coordinated approach to stabilising economies and fostering growth. Indications are that low interest rates will be maintained, with U.S. Federal Reserve policymakers debating various stimulus options and the European Central Bank potentially reversing its recent rate hike to alleviate debt. Furthermore, emerging countries still have good momentum, taking action to control inflation and balance social migration to better standards of living. China's government in particular is deftly deploying policy tools, such as depreciation of the Renminbi, to manage its inflation concerns. India continues to grow at an annual rate of 7.5%, and China maintains its position as a compelling economic force, growing at an annual rate of around 9.5%. In the past, we have underestimated the strength of demand growth, and the resilience of the global manufacturing system as it bounces back from adversity. So, although the jury is still out and we have been cautious, we believe there is some upside potential. Mining companies in particular have made productivity gains and strengthened their balance sheets. Also, the Australian Bureau of Statistics reported that mining companies increased their capital expenditure by 14% in real terms in the June quarter. Needless to say - we re all very interested in hearing what the Market Analysts Panel will say tomorrow. But the lessons of the global financial crisis have taught us that instability and lingering uncertainty provide all the more reason for Rio Tinto Alcan to focus relentlessly on being a low-cost producer. It s clear that we will continue to witness a high degree of volatility, which our Rio Tinto economists have dubbed the saw-tooth economy. Growth will unfold, but the ride will be a bumpy one. 3

4 With respect to the aluminium market, we ve recovered from the lows of 2009 and reached a peak level this year at $2772 per tonne on 28 April. Since then, prices have dropped by 15% to $2400 per tonne today similar to the path of other commodities fuelled by market instability and the disappointing macro data I mentioned earlier from the U.S. and Europe. However, global demand has grown by about 8% so far this year on the aforementioned strength of emerging economies, particularly in Asia. Visible inventory still higher than normal continues to drop in weeks of consumption, and we also believe that total inventory is declining in number of weeks. Since early April, Chinese total stocks declined by more than 600,000 tonnes on the back of strong demand from the construction, transportation, and consumer goods markets. Globally speaking, LME and IAI inventories increased by about 50,000 tonnes during that same period, as inflows to LME certified warehouses offset most of the outflows to non-registered warehouses. Given the recent macro outlook, stabilisation of inventories may be short-lived as a result of rising surplus during the second half of this year. Financial deals remain attractive for an extended period, with low interest now fixed up to mid This is naturally constraining the availability of metal to the consumer market, further supporting prices and strengthening regional premiums. Although the inventory does create overhang, we do not foresee financial deals closing until interest rates move up, in parallel with strengthening economies and underlying demand. It is important to keep more distant horizons in mind when we weigh the prospects for our industry. Aluminium is a metal for the future. We need to keep promoting our products and make sure that aluminium remains a solution of choice as the world becomes more carbonconstrained. We are very keen to continue working with our exceptional customers towards the end-products their clients are developing. Sectors with convincing prospects and track records of innovation include transportation, alternative energy, consumer electronics, power distribution, as well as heating, ventilating and air conditioning applications. In construction, the use of aluminium-based green building solutions can help architects and builders meet the stringent criteria of Leadership in Energy and Environmental Design or LEED certification, which is rapidly becoming a requirement for government buildings in many jurisdictions. Our metal s unique properties and relative attractiveness as a substitute for other materials bolster its enormous upside potential. Although we typically focus on copper substitution, other trends are supporting our industry as well. In the automotive sector, for example, the combined efforts of various producers, including Audi, BMW, Jaguar- Land Rover, General Motors, Ford, Nissan and Peugeot, have increased the amount of aluminium used in various lightweight and fuel-efficient models. 4

5 According to Brook Hunt, aluminium has also increased its market share in the consumer electronics sector. Many of you have aluminium components in your flat screen televisions, tablet computers, mobile phones and laptops. Significant growth will be driven primarily by the continued urbanisation and industrialisation of emerging economies. While much of the dialogue is about China and India, which are undoubtedly major drivers, many other nations are also set to follow a path to economic ascendancy. A list of the so-called 50-plus group assembled by forecasters at Global Insight identifies 18 other developing countries with populations of 50 million or more, each with substantial growth potential. The long-term demand outlook for aluminium has been and will remain strong. Our base case is for aluminium demand to double over the next 15 years. To return to my previous remarks about inventories, we believe that this improving demand should gradually continue driving these back to normal levels, as expressed in weeks of consumption. In total, there are some 2.5 billion people out there who aspire to live like the top halfbillion consumers in the developed world. Meeting their demands for larger living space, more sophisticated modes of transport, recyclable packaging, electronics and consumer goods will translate into demand for aluminium. Consider that per-capita consumption of aluminium is currently just one kilogram in India and five kilograms in Brazil both well below the average of over 20 kilograms in industrialised countries. In addition, we expect to see new applications for aluminium in the automotive sector as pressure on fuel consumption increases. This will in turn give a second wind to demand and per-capita consumption in Europe, in North America, and elsewhere in the developed world. Aluminium is early in its journey compared to materials like copper and steel. Our demand story is one of the most promising in the entire commodities spectrum. Turning to supply, aluminium has generally tracked demand, mainly through significant capacity increases in regions of momentous growth notably China, India and the Middle East. But our industry has become more complex, notably in terms of access to quality bauxite and clean, low-cost energy two crucial components. Primary production in China has increased to around 19 million tonnes over the past decade or so, making it both the world s largest producer and consumer of aluminium. India too has grown its primary aluminium production, from 0.6 to 1.6 million tonnes, and still has growth potential. I will return to China and India momentarily. 5

6 For its part, the Middle East is well on its way to becoming a leading primary aluminium producer. Growth there has been driven by a combination of power availability, readily available capital, and political support aimed at increasing industrial diversification and job creation. With a number of greenfield projects coming on stream over the past year or so, capacity in the Gulf region is now close to four million tonnes, compared to 1.5 million tonnes in The picture is somewhat different in Western Europe, where existing smelters tend to be higher on the global cost curve. The incentive for investing in new capacity is dampened by relatively high levels of taxation, complex regulatory regimes, and a scarcity of reliable, competitively priced energy supplies. Over the past decade, primary aluminium production in Europe including non-eu countries such as Iceland and Russia increased by about 1.7% (compounded annual growth rate). But during the same period, overall global production grew by about 5.6% (compounded annual growth rate). More than half of the 750,000 tonnes of production curtailed here during the global financial crisis is now back online. Nonetheless, if we focus in on EU-member countries only, primary aluminium production actually declined by 38.7% from its 1990 peak to This creates a challenging environment in which to operate. In recent years, our group has closed high-cost smelters in Lannemezan (France), Steg (Switzerland) and Anglesey (UK), and divested our controlling interest in Aluminium de Grèce. We have also ceased production of metallurgical alumina at Gardanne (France), with other operations under strategic review notably the Lynemouth smelter in the UK and our Specialty Aluminas business. A secure, long-life and competitively priced supply of electricity is imperative to operating a viable aluminium smelter. In many instances, closures stem from situations that left the facilities facing sharply escalating power costs, thus rendering them uncompetitive on the global stage. At Lynemouth, our strategic review was triggered by the smelter s high-cost base and the very significant increase that environmental legislation will have going forward. By 2013, compliance with the EU Large Combustion Plants Directive, aluminium s inclusion in the EU Emissions Trading Scheme, and the UK government s Carbon Price Support mechanism threaten to add significant non sustainable costs to Lynemouth s existing cost base. While no decisions have been made, options involving sale or closure of part or all of the assets are being considered. Similarly, our sites at Saint-Jean-de-Maurienne, France and Søral, Norway are nearing the end of existing power-supply agreements. Here too, we face the challenge of finding solutions to keep the sites competitive in challenging global markets. 6

7 I wish to emphasise, however, that Rio Tinto Alcan is fully committed to retaining its leadership in the dynamic European marketplace, and are working with our key stakeholders to support competitive investment opportunities in Europe. We are in the midst of a US$487-million modernisation project that will increase production capacity by 20% at the ISAL smelter in Iceland. This project includes a leading-edge casting facility to produce value-added billet expected to begin in 2012 and we will be consolidating expertise and production of slab products with existing European operations. We are also nearing completion ahead of schedule of a US$85-million undertaking to modernise our Lochaber smelter in the Scottish highlands. The new generators are 17% more energy efficient and have unlocked the opportunity for the plant to increase aluminium production by 25%. As of this November, all of Lochaber s energy demands will be met by clean, self-generated renewable hydropower. Though Rio Tinto Alcan and others continue to invest, forecasters expect Europe to become a net importer of aluminium by the year Looking at the broader picture in primary aluminium production, this graphic also reflects the growing importance of the Middle East and, to a lesser extent Africa both regions in which we are working to grow our business. We expect global capacity growth will basically continue to keep pace with global market demand, although we do see some constraints starting to build. For example, emerging-market producers will face expensive and complex challenges to adding new capacity. The Chinese aluminium industry faces rising energy costs. 15 Chinese provinces have announced increased power tariffs for industrial users. Though we have not yet seen large impacts, we are watching the situation closely. Growth will continue in the northwest part of the country, but the coastal and central provinces will face significant power price pressure in addition to concerns about bauxite and alumina availability. The medium-term outlook seems to confirm our long-held view that China will not become a destabilising market force as a significant net exporter of aluminium. It might take some time, but we believe China will eventually turn into a net importer of aluminium, as it has for bauxite and for alumina. The question is when. India, for its part, faces challenges in terms of access to bauxite and the long-term position of coal, as well as the spectre of rising inflation and high interest rates. Despite the advantages of a captive power supply, Indian smelters are not benefiting from stable power costs. The continuous shrinking of domestic coal supplies which were formerly available from Coal India at favourable prices is a major cost issue to smelters, exposing them to increased energy-price volatility. Therefore India becoming a large net exporter of aluminium is also unlikely. 7

8 As mentioned earlier, energy costs have been climbing, led by significant increases in oil and coal prices. In the long run, energy costs are expected to increase further, thus supporting long-term aluminium prices. Our view of the aluminium industry for 2015, with cost upsides, includes energy and other drivers that could steepen the cost curve. Notably, further appreciation of the Chinese currency will increase the country s smelting costs in U.S.-dollar terms, and therefore continue impacting marginal producers. If we conduct a basic sensitivity test, a Renminbi appreciation of about 10% combined with an increase of $5 per megawatt hour for electricity would increase their costs by around $250 per tonne. This impact is substantial, and if we layer in a cost representing the additional capital required to construct new capacity, we see further supply-side pressure. With respect to alumina, linkage rates have recently moved up from the 13-14% range to the 15-16% range, to reflect changing industry fundamentals. The introduction of index-based pricing is moving to ensure that the higher full economic cost for new refineries is fully and transparently reflected in price. Rio Tinto Alcan is supportive of the index. The new pricing models will deliver more value for us as we grow our position in the alumina market, and it will further the steepening of the cost curve of non integrated and marginal producers. To wrap up on the supply-demand picture, I should note that steepness of the cost curve is likely to continue, creating a scenario that puts increased pressure on marginal producers. Historically, this also favours fully-integrated, low-cost producers and allows them to generate solid margins throughout the economic cycle. This is the space that Rio Tinto Alcan intends to occupy and provides a nice segue into the topic of our strategic priorities. As we carry on with our transformation journey, our most immediate priority is to continue delivering on what we call our baseline commitments: - exceptional performance in health, safety and the environment - building solid relationships with key stakeholders - meeting the needs of our customers, many of whom are with us today - robust financial performance We have reduced our all-injury frequency rate by almost two-thirds since Our primary goal is to reach zero harm in the workplace. This is attainable and our ISAL smelter s stellar performance won the Rio Tinto Chief Executive s Safety Award for Except for one incident in 2009, ISAL has had zero injuries since 2007, and has completed 4.7 million work hours without a lost-time injury. Financially, we have also seen positive indicators. The Rio Tinto group reported record first-half underlying earnings of $7.8 billion 35% above the 2010 first half. 8

9 Rio Tinto Alcan further improved its underlying earnings as well. We continue the positive momentum of 2010 when we delivered a $1.3-billion improvement in underlying earnings while generating 21% EBITDA margins on an average LME price of $2,170 per tonne (excluding trading activities). And we are committed to further improvement. This will require driving three major initiatives. First, we strive to achieve further improvement from our current portfolio of assets. The key here is continuing to deliver on cost and margin improvements by leveraging Business Improvement tools and taking advantage of our scale and know-how. Our second priority is portfolio discipline which we take very seriously. Our approach entails focusing on top-tier assets that provide strong margins. We have recently closed or divested a total of 6 plants, including the Ningxia smelter in China, the Awaso bauxite mine in Ghana, the ageing Beauharnois smelter and Brockville specialty alumina plant in Canada. We will continue to carry this focus on portfolio discipline forward. I consider our primary advantage to be the overall quality of Rio Tinto Alcan s resources. Our access to bauxite, our unrivalled power position, our high-calibre operations, and industry-leading technology give us the vital components required of an integrated low-cost producer. With respect to the quality of our portfolio, we have some truly outstanding assets in France. Rio Tinto Alcan is proud of its deep roots here, where Pechiney pioneered the industry back in the late 19 th Century and Alcan first established a presence almost 100 years ago. Some of you visited the Dunkerque smelter earlier this week. We continue to tweak the performance of this world-class facility, which is known for its high-quality aluminium sheet. We are also proud of our R&D facilities in Voreppe and the renowned Saint-Jean-de- Maurienne research-and-development complex, an integral part of our global technology efforts. Our third priority is sound execution of our growth projects, capitalising on modernisation and expansion opportunities that leverage our quality bauxite and lowcost, clean hydroelectricity. Rio Tinto Alcan s vision is quite simply to be the world s preferred aluminium business, from mine to market, with an unparalleled portfolio of long-life assets and the lowest possible position on the cost curve. This will require robust performance during all phases of the industrial and economic cycle, and leveraging our advantages as we move forward. 9

10 We are one of the largest bauxite producers in the industry, and we aim to become long in both bauxite and alumina. Thanks to logistical proximity, we are well positioned to supply China and as alumina pricing evolves, we intend to deliver our Yarwun II expansion project in Australia. Rio Tinto Alcan s access to renewable self-generated power translates into around 63% of our energy being sourced from hydro, which compares favourably to the global aluminium industry total of about 32% hydro-based power for smelting. Around 97% of the group s power is secured by self-generating facilities or long-term contracts with limited linkage to the LME aluminium price, ensuring relatively low and predictable cost escalation. This represents a sustainable benefit, which we intend to build on through growth and efficiency initiatives. Rio Tinto Alcan s exceptional technological capabilities generate added value. In recent years, we have successfully integrated the knowledge and legacies of Alcan, Alusuisse, Comalco and Pechiney into our best practices at operations spanning 27 countries. The AP Technology edge is perhaps most evident but by no means limited to our benchmark smelting technology. The AP30/AP3X series, represents the most comprehensive, low-risk, bankable smelter technology commercially available. It delivers the industry s lowest full economic costs and continues to be deployed around the world. Tomorrow s reduction cell will be the AP60, the most cost-effective, energy-efficient and environmentally-friendly smelting technology ever to reach the threshold of commercial development. Operating at an unprecedented 600 ka, AP60 will deliver a $60-to-$90 full economic cost advantage per tonne over the existing AP3X when comparing a single line. Benefits will include 40-per-cent higher unit production, and an almost 10-per-cent reduction in the required capital investment per tonne installed. But we are definitely not resting on our laurels. Research teams in Saint-Jean-de- Maurienne are already engrossed in our experimental AP-Xe technology and started up the prototype earlier this year. AP-Xe will combine next-generation technologies targeting further step changes in energy consumption, environmental impact and full economic costs the three main factors motivating our ongoing development. Finally, with so many of our customers joining us today, I d like to restate that our global commercial capabilities are a part of our core strengths, and we like to think of ourselves as a partner of choice. We work with customers at all stages of the supply chain, from sales of bauxite through to value-added aluminium products, logistics swaps, and technology sales. We are global, reliable, and focused on sustainable, long-term growth in all our markets. 10

11 Having reviewed our strategy, let s take a closer look at Rio Tinto Alcan s growth pipeline. We thrive on tier one opportunities ones that are large-scale, low-cost and long-life. As I indicated earlier, there is an emphasis on high-return capacity creep and brownfield and modernisation projects but we also have promising greenfield projects, to be paced with market demand. Time does not permit me to describe all our projects, but I have already mentioned the major expansion and modernisation of ISAL and the repowering initiative at Lochaber. Suffice it to say that global project funding tripled year-over year for 2011 and is projected to ramp up further as we finalise our decision on the Kitimat modernisation later this year. The AP60 smelter project in Quebec s Saguenay region is the first commercial-scale implementation of our newest AP smelting platform. First metal is expected in 2013 and our vision is to expand this initial facility to a full-scale 450,000-tonne smelter. In the same region, construction of a new turbine at the Shipshaw power station is on track for December Elsewhere in Canada, the truly transformational Kitimat modernisation project will increase the smelter's current production capacity by more than 48 per cent, to approximately 420,000 tonnes per year. The modernised smelter will be powered exclusively by hydroelectricity and use AP Technology to cut annual emissions intensity by more than 50 per cent. Once completed, Kitimat will be one of the lowestcost aluminium smelters in the world. On the alumina side, I alluded earlier to our Yarwun II alumina project in Queensland, Australia. This two-million-tonne expansion set for completion during the third quarter of next year. The project leverages our bauxite position in Weipa and is expected to generate significant benefits from the scale-up of the original production facility and installation of a co-generation plant that already produces surplus electricity for thirdparty sale. Other attractive brownfield opportunities on the drawing board include expansions at the Weipa bauxite mine in Australia, our bauxite operations in Guinea, the recentlycompleted Sohar joint-venture smelter in Oman and the Alma smelter in Canada. We are also planning to modernise and expand the joint-venture Alucam smelter in Cameroon, and add a hydropower station. As markets continue to improve we will also be well-positioned to capitalise on attractive greenfield opportunities, including the Amargosa bauxite deposits in Brazil, an alumina refinery in Guinea, and smelter projects in Malaysia, Paraguay, Cameroon, and other locations where low-cost electricity can be made available. 11

12 Common denominators among all these projects include a low carbon footprint, low operating costs and attractive projected returns. All are designed to help position us to supply key markets and move further down the cost curve while enhancing environmental performance. When assessing a company s all-round strengths, its character and reputation are priceless. Indeed, to conclude on the topic of competitive advantages, I wish to cite Rio Tinto Alcan s reputation and track record with respect to sustainability and regional economic development. In addition to direct investment and job creation, we can provide a solid foundation for the economic development and diversifications of host communities. For example, some 70 per cent of the permanent jobs at Sohar Aluminium are held by Omani citizens. Furthermore, for every direct job created, the smelter has generated more than four times that number in spin-off jobs for the regional economy. This includes local suppliers, jobs at Sohar Industrial Port, and employment at a cluster of new downstream industries spawned by the arrival of the smelter. Our dedicated teams work closely with project management to coach local entrepreneurs with respect to the development of their businesses, helping to identifying and create new commerce that can benefit from Rio Tinto Alcan s presence. Our large global footprint and know-how gives us experience and knowledge worth sharing. I should note that this responsible, comprehensive approach is not simply a matter of doing the right thing. In fact, it is absolutely essential if we are to be granted a license from society to operate and grow and to be regarded as a partner of choice when opportunities knock. We are very proud of Rio Tinto Alcan s track record on sustainability. That said, however, I know that certain elements of our approach are shared by other responsible industry players, large and small. And that s a good thing, because it is crucial to the future of our entire industry that we all demonstrate a trustworthy commitment to social responsibility and concern for the environment and well-being of our people. To sum up, while we remain cautious about the short-term outlook as we have for the last couple of years we note that global aluminium markets are gradually improving. Strong profits are available to well-positioned, low-cost producers, and Rio Tinto Alcan will continue targeting that space in the industry. We are focusing on disciplined cost and portfolio management, as well as leveraging our quality bauxite, unrivalled electricity position, benchmark technology and developing our exceptional growth pipeline. We also remain committed to exceptional customer service, aiming to distinguish ourselves with consistent quality and delivery performance. 12

13 More broadly, it s incumbent on all of us to promote aluminium as a sustainable material of choice. The world needs more aluminium, for all the right reasons. We are therefore focused on serving our customers in all markets as a partner of choice. Ours is an exceptional metal one that is, among other things, infinitely recyclable. Aluminium will facilitate progressive solutions in fields ranging from eco-responsible architecture to fuel-saving transportation. Our products will contribute to reducing greenhouse gas emissions and fighting climate change. We may take it for granted that engineers and designers not to mention the average consumer appreciate those special properties. But this is not necessarily the case. We are fortunate as an industry to have a lot of innovative, forward-thinking customers, excellent suppliers, and outstanding employees. Furthermore, over the past year, the competitiveness of our metal has continued to improve, making substitution of aluminium an even more attractive proposition for numerous applications. The combination of aluminium s advantageous physical properties and its price relative to other metals means we are likely to see this trend continue in products ranging from wire and cable to air conditioners, electric and hybrid vehicles and solar collectors. In short, I think aluminium is a good business to be in. Our potential is limited only by the breadth of our vision. As the celebrated French writer and aviator Antoine de Saint-Exupery once wrote, a rock pile ceases to be a rock pile the moment a single man contemplates it, bearing within him the image of a cathedral. Thank you. Merci. 13