Jérome Pécresse, chief executive of aluminum and lithium at Rio Tinto, in a boardroom at the company's offices in Montreal, on April 15.ROGER LEMOYNE photographer/The Globe and Mail
Rio Tinto Group RIO-N is moving to squeeze as much aluminum as it can from its Canadian smelters to meet demand from U.S. customers as the war in the Middle East lifts global prices and exposes the fragility of supply chains.
The Anglo-Australian multinational’s five wholly-owned smelters in Quebec’s Saguenay region and one in Kitimat, B.C., are already operating near full capacity but mining staff are working to restart a number of smelter pots currently not in use to maximize output, according to Jérôme Pécresse, head of the company’s global aluminum and lithium business.
Pots are deep shells lined with carbon and insulating bricks in which aluminum is made through electrolysis. A modern smelter typically contains 300 pots or more.
The conflict pitting the United States and Israel against Iran is “going to create a supply gap at some stage,” Mr. Pécresse said in a recent interview. Multiple aluminum smelters in the Persian Gulf have curtailed or stopped production, a situation that won’t quickly recalibrate even with a ceasefire or permanent peace deal, he said.
“It’s created a tense situation in which we’re trying to play our role as a stable and reliable supplier for the American market,” Mr. Pécresse told The Globe and Mail. “We’re spending a lot of energy and effort to try to serve our American customers, in the same way we served them before this crisis, and even more.”
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Although Rio Tinto has limited scope to boost production, the fact that it is trying shows the extent to which the economic environment has evolved in the year since the White House first imposed a 25-per-cent import tariff on aluminum. The levies, since doubled to 50 per cent, aren’t significantly pinching demand and costs are being absorbed through the system as the lightweight metal goes from the primary producers to finished products such as beer cans and cars.
Toward the end of last year, Rio Tinto was shifting some of its Canadian aluminum to Europe as it sought “a more profitable trade,” Mr. Pécresse said at the time. Now, most of that volume has swung back to the United States, the historical destination for Canadian metal exports.
“So far, aluminum demand in the U.S. and in every market is quite solid,” Mr. Pécresse said. “And the reality is that Quebec remains the source of the lowest cost, lowest carbon aluminum possible for the U.S. market. That’s what we’ve seen since more than a year.”
Global aluminum prices shot up to three-year highs after Iran largely shut down the Strait of Hormuz in late February, choking off commercial shipments in and out of the Persian Gulf. The region produces about 9 per cent of the world’s aluminum output.
“What initially appeared as a disruption to shipping and logistics has now evolved into a material supply shock,” ING commodities strategist Ewa Manthey wrote in a note published Thursday. Based on current operating rates, the aluminum market would be in a deficit of close to 2.9 million tonnes if disruptions persisted to the end of the year, she said.
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Iran announced a reopening of Hormuz on Friday but reversed itself Saturday, sowing confusion about what comes next. But even if new negotiations lead to a permanent resolution, analysts warned that it might take months for aluminum smelters to reboot and supply chains to return to normal.
Emirates Global, the Middle East’s biggest aluminum producer, stopped operations at its Al Taweelah smelter in Abu Dhabi after the site was hit by Iranian missiles and drones in March. The company said the facility went into an emergency shutdown and that it will take up to a year to get production back up after repairs are done.
In addition to being unable to ship their aluminum out through Hormuz, producers have been unable to import the raw materials they need to make the metal, including alumina. Smelters could further cut back production if existing constraints on alumina supply deepen and logistics disruptions continue, the ING analyst said.
Rio Tinto makes close to half its global aluminum production in Quebec’s Saguenay-Lac-Saint-Jean region, where the company is celebrating a 100-year industrial presence this year. Its operations in the area, underpinned by stable access to hydroelectricity, includes the five smelters, an alumina refinery, six power plants, a research and development centre, a rail network and a port.
Water reservoirs for the Quebec hydroelectric facilities are filling well with the spring melt while the one supplying Kitimat is full for the first time in years, Mr. Pécresse said. “That will allow us to maximize what we can do,” he said.
The mining giant, which took over Quebec aluminum maker Alcan in 2007, is currently spending $5-billion on several projects to bolster its aluminum footprint in Canada. It is investing $1.4-billion to expand a smelter that uses lower-carbon AP60 technology at its Complexe Jonquière site and another $1.7-billion to modernize a key power plant in Quebec, among other initiatives.
More broadly, Rio Tinto chief executive Simon Trott is trying to “simplify” the company by offloading as much as US$10-billion of assets and sharpening its focus on production of four commodities key to the energy transition: iron ore, copper, aluminum and lithium. With the closing of the Diavik mine in the Northwest Territories last month, the company has exited the diamond mining trade.
“There was a lot of emotion tied to that,” Mr. Pécresse said, adding that Diavik, located under a frozen lake, had exhausted its profitable reserves after a 23-year run. “It operated very nicely in difficult conditions in the NWT for a long time. It was an industrial, technological marvel.”