Mining giant, Rio Tinto plc (RIO) recently announced the closing of its 40-year-old Lynemouth smelter in Northumberland, England forced by significantly rising energy costs, which over time, was affecting the sustainability of the smelter business.
A month ago Rio revealed its plan to streamline its aluminum product group, expecting to divest 13 assets in the future backed by the rising energy costs and low price realization in the aluminum market. As part of this restructuring plan, the company has decided to shut down their 178,000 metric tons capacity Smelter, which significantly ruled over 0.5% of the global aluminum supply. Rio is also planning on the potential sale of the power station at the site.
This closure is the company’s first planned cut in aluminium production (outside China) and one of the first reductions in output of any base metals since the fall in prices from over $2,800 per tonne in May to around $2,130 per tonne, of late. According to analysts, the announcement of the smelter closure highlights a potential trend for providing support for aluminum prices.
Analysts also believe that, given the non-profitability of operations, all other aluminum producers are expected to lower their output in the coming months too, which may help to release the downside pressure on prices, at least until production costs drop further. Given the different cost structures of the respective industries, analysts forecast aluminum to fall another 6% to $2,000 per tonne by the end of 2012, whereas copper is expected to drop by more than 20% to $6,000 per tonne over the same timeframe.
Headquartered in London, UK, Rio Tinto is engaged in exploring, mining and processing of the earth’s mineral resources, producing a broad range of metals and minerals. The company competes against global mining giants like BHP Billiton Ltd. (BHP) and Vale S.A (VALE).
We believe the company’s divestiture programs are conducive toward maintaining a balanced financial position, going forward. We currently maintain a long-term Neutral recommendation on the stock.
