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EXTERNAL ENVIRONMENT, OPPORTUNITIES AND THREATS

GLOBAL PRIMARY ALUMINIUM INDUSTRY

SITUATION AND TRENDS

  • Steady growth in global consumption of aluminium (driven predominantly by China, but also Brazil, India and North America)
  • However, global supply in excess of demand, resulting in underperformance of LME aluminium price relative to other metal commodities
  • Concerns over slower Chinese economic growth, volatile emerging market currencies and the curtailing of the Federal Reserve’s bond-buying programme have contributed to accelerated decline in the LME aluminium price
  • Predominance of high metal premiums in recent years, which have insulated marginal smelters from impact of low LME aluminium price. However, rapid surge in premiums in the first quarter of 2014 and increased volatility have put pressure on producer and consumer sectors
  • Impact of growing pressure to reduce carbon emissions and changing energy environments will place pressure on high-cost smelters
  • Global shift towards recycling scrap as an alternative input to primary aluminium gaining momentum

IMPACT, OPPORTUNITIES AND THREATS

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  • High, rising and volatile metal premiums put pressure on producers and consumers, introduce “margin squeeze” risk, impact demand for aluminium products, put pressure on establishment and maintenance of multi-year/long-term contracts
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  • Falling LME puts pressure on high-cost, marginal producers

SOUTH AFRICAN PRIMARY ALUMINIUM INDUSTRY

SITUATION AND TRENDS

  • Cost (labour) and price pressures (low LME aluminium price) on local BHP Billiton aluminium smelters
  • Local aluminium smelters are significant electricity consumers and have been the focus of significant negative media attention and public sentiment due to the preferential deals which they have with Eskom whilst local electricity supply is constrained and other consumers have incurred sharp escalations in electricity pricing
  • Local smelters export the majority of primary aluminium in an unbeneficiated form, whilst the Bayside value-added products (VAP) cast house is underutilised, leading to large-scale importation of aluminium VAPs by the local downstream industry at high cost
  • Proposed carbon tax legislation will have a significant negative impact on the aluminium smelters which could potentially render them unviable, however, the local downstream industry, which is reliant on these smelters, is not carbon intensive

IMPACT, OPPORTUNITIES AND THREATS

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  • Upward pressure on primary metal pricing to local semi-fabrication industry
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  • Viability of local primary aluminium smelters under pressure:
    • Closure of BHP Billiton’s Bayside smelter announced (January 2014)
    • Pressure on BHP Billiton’s Hillside smelter remains
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  • Future of BHP Billiton’s Bayside cast house remains uncertain

SOUTH AFRICAN ECONOMIC AND POLITICAL ENVIRONMENT

SITUATION AND TRENDS

  • Industrialisation is a national priority. Government policy is seeking to restructure the economy toward more value-adding, labour-intensive and environmentally sustainable growth. Focus on improving exports of beneficiated products
  • National focus on energy efficiency and recycling initiatives
  • South African government is becoming increasingly aware of role for trade agreements and regulatory frameworks to protect and support the economy
  • Labour costs escalating above inflation, combined with significant volatility and unrest in labour relations
  • Availability and supply shortages of local gas and increasing and high pricing. Opportunities to unlock shale gas
  • Constraints in availability of electricity supply and increasing prices

IMPACT, OPPORTUNITIES AND THREATS

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  • Increasing local cost base and reduction in supply availability (labour, electricity and gas)
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  • New scrap export legislation will promote local processing of scrap for the benefit of local industry
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  • Proposed carbon tax legislation will have a significant negative impact on smelters and could, in turn, severely impact downstream fabricators
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  • Aluminium can play a significant role in supporting downstream fabrication and industrialisation, job creation, development of high technology applications and industries and promoting reduced carbon intensity in the economy

GLOBAL ALUMINIUM SEMI-FABRICATION MARKET

SITUATION AND TRENDS

  • Significant demand growth in packaging, transport and infrastructure applications driven largely by the growth in developing economies
  • Significant growth in automotive consumption of rolled products in developed countries and ongoing development of new applications for aluminium
  • Significant roll-out of capacity in low-cost regions such as China and Middle East
  • Trade politics continues to influence global flows of aluminium semi-fabricated products
  • Global shift towards recycling scrap as an alternative input to primary aluminium gaining momentum

IMPACT, OPPORTUNITIES AND THREATS

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  • Conversion margins under pressure due to additional capacity roll-out in low cost and government-incentivised regions
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  • Increased global demand for secondary metal impacts on price and availability thereof
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  • Increased pressure from imports on domestic manufacturing
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  • Growth in demand for new and non-traditional applications for aluminium, such as consumer electronics and military markets. Significant growth in automotive sectors forecast

REGIONAL MARKET DEVELOPMENT

SITUATION AND TRENDS

  • Rapid population expansion and urbanisation in sub-Saharan Africa resulting in increased infrastructure and transport spend growth, rising income levels and increasing consumer spend, leading to growing per capita spend on aluminium
  • Ongoing efforts by African states to secure regional economic development and industrial integration

IMPACT, OPPORTUNITIES AND THREATS

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  • Growing regional consumption of aluminium primarily in consumer applications and packaging, transport and construction/infrastructure
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  • Opportunities for increased investment in downstream fabrication industries in South Africa to capitalise on growth in the region
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  • Increasing availability of aluminium scrap in the region