The FINANCIAL — The aluminum industry has experienced an abundance of severe challenges in recent years, resulting in a sharp decline in company valuations and profits. To reignite the value creation engine and restore investor confidence, CEOs and their management teams can pursue aggressive action plans that will turn around the industry, according to a new report by The Boston Consulting Group (BCG).
“Our analyses show that the industry’s crisis can’t be traced back to an unexpected drop in demand caused by the global economic downturn or sudden changes in the value chain’s upstream or downstream segments,” said Thomas Bradtke, a BCG partner and coauthor of the report. “The crisis arose from the supply side, driven by China’s strategy to increase its capacity for producing primary aluminum. Producers in the rest of the world misinterpreted China’s moves and didn’t adjust their own strategies fast enough in response,” he added.
“Global aluminum consumption has been driven almost entirely by China since 2000, and we expect this trend to continue,” said Kai Gruner, a BCG senior partner and coauthor of the report. “China’s capacity for producing primary aluminum has also grown dramatically, and its imports have declined significantly. Western aluminum companies weren’t expecting this, and they expanded their capacity in anticipation of increased Chinese imports. The resulting overcapacity and high inventory have caused the aluminum price to remain at low levels,” Gruner added.
Developments in the value chain’s upstream and downstream segments are adding to Western companies’ challenges, finds the report. China will likely have sufficient bauxite and alumina to meet its demand for feedstock. And Chinese manufacturers have become leading players in the global market for semifabricated and fabricated aluminum products.
“To become profitable and generate attractive returns for their shareholders in this environment, aluminum companies must adopt a more aggressive approach to confronting the industry’s challenges,” said Knut Olav Rød, a BCG partner and coauthor of the report. "We believe this more aggressive approach must be implemented on the industry level as well as the company level. The scale of the problem is too daunting to be resolved by individual companies acting independently," he added.
The report advises individual companies to explore upstream opportunities in bauxite and alumina and focus on high-value or lowest-cost downstream businesses. It also recommends that companies substantially raise their game in three critical dimensions of business performance: operating and overhead costs, management of large-capex projects, and commercial activities.
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