Rio returns

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Rio Tinto is building two smelters in the Gulf, one in Oman and one in Saudi. However, the Saudi plant may be delayed due to falling steel prices.

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Dick Evans chaired the mining and metals council at the Global Agenda Summit of the World Economic Forum in Dubai earlier this month.

Despite this, he is not ruling out further expansion in the region, despite a dip in global aluminium demand.

"We had some investigations and contact in Algeria and Libya at an early stage. Both have natural gas and both are interested in having smelting capacity," he explains.

After China, Evans believes the Middle East is next best placed to see further growth within the industry because the availability of energy and infrastructure capability gives it an advantage over both Russia and Africa, where the infrastructure capability is not yet in place.

However, he foresees a slowdown in new aluminium projects in the region in the short term.

"There's a structural change taking place with the reprioritisation of gas and where it is consumed. There will be a lot of growth here but I think it will begin to slowdown as gas prices are going to fall back," he adds.

The aluminium industry has not proved immune to the global financial turmoil in the markets, with a drop in demand dragging down MAL3 aluminium prices on the London Metal Exchange more than 40 percent since July.

"Physical demand is falling, so there's no growth," Evans says. "China's demand is still growing year on year but its rate of demand is declining. The net for the year is likely to be slightly up, but there's a big difference between the first half and second half.

"In a period of destocking there's also the impact of people making irrational decisions in terms of selling into a weak market because of the risk of being wrong if you keep inventory. Everybody is managing for cash and that could cause the market to overshoot."

It is not before mid next year that he sees the aluminium market starting to pick up from its current lull.

"The most likely scenario is that it will be towards the end of the first half into the second half before things stabilise and the full affects of destocking, the pull back in capital expenditures and the excess, is out of the market."

The key to when the recovery begins, he believes, is China, the world's top aluminium producer and consumer, where, according to Evans, producers have announced cuts of nearly two million tonnes.

Dutch aluminium producer Vimetco said earlier this month that it will cut its production in China by a further 15,000 tonnes, in addition to the 80,000 tonnes it announced in October.

"It's all dependent on how soon China takes more capacity out of the market," Evans explains. "The market is going to need to see inventory to come down and as long as inventory is still climbing for temporary reasons like destocking I don't think you'll see movement in price.

"The question is whether what China has announced is actually offline physically - there's a suspicion that some of the announcements haven't actually happened, and there are others who think it has happened. My suspicion is that some of it has happened, not all, maybe 50 to 70 percent of what they have announced has happened, and that is probably not sufficient to bring it [a market recovery] about."

A major challenge facing the industry, Evans believes, is finding sufficient supplies of energy for projects.

"It's the challenge anywhere as it's the single largest cost, and today the most economic size of smelters has got bigger, so therefore you need a bigger block of power to have a low-cost project."

Before the year is out Rio Tinto could be made the subject of a firm takeover proposal from BHP Billiton, the world's biggest miner, but the deal remains in the balance after European Union antitrust authorities expressed concerns, reported to be over competition issues.

But Evans says he expects to receive a decision from BHP on whether it is willing to make a firm takeover proposal as early as Dec 1, or as late as mid-January.

"At this point it is far from certain that it will go-ahead and there are other possibilities of creating value to shareholders that Rio Tinto is evaluating, that we have not disclosed yet," says Evans. "Whatever happens, our decisions will be guided by the interests of our shareholders."

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