1. 28 ALUMINIUM · 7-8/201228 ALUMINIUM · 7-8/2012
Analysis of production costs in the aluminium smelting industry
G. Djukanovic, Podgorica
When talking about production costs in the
aluminium smelting industry it is inevitable
to refer to research companies such as Brook
Hunt and CRU Group, both from UK, or the
Australian AME Group and Harbor Intelli-
gence from USA. They are world leaders in
metals smelters production costs analyses, in-
cluding power tariffs, raw materials and other
costs.
At current market price (around USD1,880/
tontheLMEinmid-July)atleast60%ofworld
smelters (or more precisely: world aluminium
production) have production costs above mar-
ket price. However, due to record-high alu-
minium premiums (over USD200/t in Europe
and Asia and around USD250/t in USA) and
power supply contracts with tariffs linked to
the LME price, the percentage of currently
loss-making smelters is significantly lower.
Moreover, many companies have hedged their
sales prices for the entire year 2012 and be-
yond at levels higher than the current LME
price and even higher than their production
costs; therefore, they are protected from fall-
ing aluminium price.
In any case, there is no doubt that margins
are positive for smelters in the Persian Gulf,
Canada, Russia, Iceland and South Africa,
whereas a significant number of those in Chi-
na, USA and Europe are cash negative, even
if taken into account that the aluminium price
is several hundred euros higher at the Chinese
market compared with the LME price. Those
smelters who tied their sales to LME prices
(cash seller and settlement or 3-month price),
and now confronted with production costs
higher than the current LME price, are losing
money. Smelters with production costs in the
range of 90 percentile on the cost curve and
sales tied to the LME price were able to make
profit only during the period 2005 to 2008.
Production costs are directly related to the
economic environment, and during economic
crises, as in 2009, a sharp decline in the alu-
minium price is followed by a significant fall
of raw material prices, power tariffs and ship-
ping rates (though with a lag of several months
for some raw materials prices). Since all input
costs were lower in 2009 compared to record-
high costs in 2008, production costs decreased
between 30 and 40% that year. With the eco-
nomic recovery in the following two years,
input costs generally increased even though
to a level below that in 2008, with the result
that smelters’ production costs were somewhat
lower in 2011 than in 2008. A devaluated US
dollar against the Euro in 2011 also contrib-
uted to lower input costs for smelters outside
USA. CRU calculated that a 20% swing in the
value of the US dollar resulted in a 10.9%
swing in the world average business costs,
which points to the large amount of produc-
tion costs that are incurred in US dollars.
Following a sharp decline in 2009, world
smelter business costs rebounded significantly
in 2010, by over 20%, and are expected to
keep on rising a further 7% between 2010
and 2012, according to CRU. These increases
are due to the progressive rise of most raw
material prices and energy costs. In the period
of 2002 to 2008, aluminium smelter business
costs rose 111% from the bottom in the last
cycle (USD962/t) to a peak at USD2,032/t,
again according to CRU. Costs are expected
to stagnate or even decrease this year and to
rise again next year.
New aluminium smelters will naturally
be set up in regions where production costs
are at the lower end. In the near term, Russia
and the Middle East will most likely see new
production capacities being built up, whereas
in the long term Malaysia, Angola, Paraguay
and Greenland could be further candidates.
Brazil has become less attractive due to high
power tariffs, and Australia is affected by the
introduction of carbon tax. Several industry
experts expect that the world primary alu-
minium production is expected to rise to over
70m tonnes by the end of this decade. The
aluminium demand during this period will be
driven by further urbanisation and industriali-
sation in China and India and by the dynamic
growth of the transportation sector.
Structural changes of
aluminium industry costs
The aluminium industry has gone through a
significant structural change in its operating
costs between 2005 and 2008. As a result,
by the end of this decade operating costs are
likely to remain at levels 80 to 100% higher
than those experienced in the beginning of this
century.
In 2012 the Gulf region is likely to become
the lowest cost region in the world. Also, due
to the start up of new capacities and expan-
sions,the aluminium output in the Middle East
is expected to grow from around 4m tonnes
this year to some 6m tonnes by the end of
2015 after new projects in Abu Dhabi and
Saudi Arabia are completed.
Aluminium cost curve lifted by cost pressure
Goran Djukanovic is an aluminium market analyst
with focus on aluminium and other non-ferrous
metals, and energy markets. He represents the
Central Bank of Montenegro in Reuters base met-
als polls and is the only analyst from southeastern
Europe to participate in the poll. He is one of the
speakers at the Aluminium Conference 2012 in
Düsseldorf in October. Mr Djukanovic is located in
Podgorica, Montenegro. Email: gordju@t-com.me.
Hydro
Djukanovic

2. Anzeige 1/2
According to a recent research by CRU, the
Sohar aluminium smelter in Oman is the low
cost benchmark in 2012 with corporate costs
of less than USD1,200/t, while the Middle
East would represent 34% of the production
in the second lowest cost category (USD1,200-
1,399/t). The Qatalum smelter in Qatar will
be second best on a corporate costs basis
of USD1,272/t. Argentina’s Aluar (Puerto
Madrin) as well as India’s Nalco and Vedanta
are producers with the next lowest business
costs in the world, in the range of USD1,350-
1,400/t in 2012.
On the opposite side, Kombinat Alumini-
juma Podgorica (KAP) in Montenegro and
Talum in Slovenia mark the top end with
the highest smelter costs in 2012. However,
Chinese smelters such as Qinghai Investment
Group and Guangxi Investment Group have
the largest increase of costs and worldwide
highest production costs of USD2,800/t and
above this year, according to CRU.
Main costs of an aluminium smelter
Alumina,electricityand,inmanycases,carbon
costs represent the three major cost factors
of every smelter. While alumina and carbon
costs hardly differ for most smelters, electric-
ity costs differ dramatically. Labour and other
costs also vary widely depending on the region
but are of minor importance in relation to the
total cost structure.
Though the alumina price at the spot mar-
ket was around USD320/t in recent months,
or usually 15.5-17% of the LME price in long
term contracts, smelters who have to buy alu-
mina pay around USD400/t currently, after
transportation, port services and customs are
included, and over USD450/t in China. Given
that almost two tonnes of alumina are needed
to produce a tonne of primary aluminium, in-
put costs for alumina vary between USD800-
900 in each tonne of aluminium produced.Ac-
cording to CRU alumina costs accounted for
39% on average of world smelters production
costs in 2011.
Electricity costs vary widely depending
on region, with power tariffs around USD20/
MWh in the Middle East, USD35-40/MWh in
the USA and Europe, and around USD70/
MWh in China. So smelters in the Gulf region
spend around USD300 for power to produce
one tonne of primary aluminium, while Rus-
sian smelters have to pay almost USD400/t
after recent increases of power prices, and
smeltersinWesternEuropearoundUSD650/t.
ChinesesmelterspayanaverageofUSD1,020/
t of primary aluminium produced.
Anode prices, after an increase to over
USD800/t in 2008, returned to aroundComparison of global aluminium cash costs (USD/t)
Antaike

3. 30 ALUMINIUM · 7-8/201230 ALUMINIUM · 7-8/2012
USD650/t in Europe and USD70-80/t lower
in China in 2012. The carbon anode manu-
facturers are mainly exposed to global oil and
coal costs. Anodes are made from petroleum
coke and recycled carbon mixed with liquid
pitch. A significant amount of heat is used as
the anodes are baked for 18 to 20 days at over
1,000 °C. As the oil and coal prices have tum-
bled in recent months, so has the cost base of
anode makers.
Highest labour costs in the aluminium in-
dustry are in Australia, Canada, Norway and
in the European Union in general while the
lowest are in China and India (from bigger
producers). Labour costs will fall due to higher
productivity. Between 2010 and 2016, Brook
Hunt expects that labour costs will fall by 17%
to USD89/t of aluminium produced.
Brook Hunt forecasts that the global
weighted average depreciation charge will rise
by 17% to USD112/t of aluminium, reflecting
the large wave of new capacity, greenfield and
brownfield due on stream by 2016, which will
outweigh the impact of a number of facilities
becoming over 20 years old.
Shipping costs are significantly lower this
year compared with record costs in 2008,
mostly due to rapid ship building in China in
recent years.
Power prices for smelters rising
Worldwide power prices for aluminium smelt-
ers on average increased over 100% over the
last decade, while total smelters’ cash costs
on average increased around 90%. World’s
average power tariffs increased from USD19/
MWh in 2001 to USD43/MWh in 2011. Av-
erage power costs increased from USD300/t
of primary aluminium produced at the be-
ginning of the century to over USD650/t in
2011, representing about one third of world
average smelters’ production costs. Long term
power contracts for smelters that expired re-
cently put them often in an unpleasant posi-
tion since new contracts are offered at much
higher prices, resulting in several closures
recently in Europe. Excluding China, world
power tariffs increased from USD16/MWh in
2001 to USD27/MWh in 2011.
Outside China, the highest power tariffs
in the world in 2011 had smelters in Brazil,
Alumar and Albras, of around USD54/MWh.
Although the Chinese industry tends to oc-
cupy much of the third and fourth quartile
on the cost curve, the most smelters at risk
remain those located in Europe and the USA.
Whilst some producers in these regions have
managed to negotiate more favourable power
contracts, many smelters will remain at the
high end of the cost curve and may become
the swing smelters for the industry.
The highest power costs in the USA for
aluminium smelters in 2011 had Century Alu-
minium’s 224,000 tpy Mount Holly smelter
in South Carolina (USD52/MWh), compared
with the average cost of USD37.57/MWh in
the USA. Century’s 244,000 tpy smelter in
Hawesville, Kentucky, is on the brink of clo-
sure after its power supplier, Big River Elec-
tric,recently increased the power price to over
USD48/MWh.
More than half of the global aluminium is
produced using renewable and environmen-
tally friendly hydropower. The share of hy-
dropower usage is particularly high in Latin
America, Canada and Russia, while all smelt-
ers in the Middle East are powered on gas.
Smelters using latest technology consume
as low as 12.2-12.5 MWh/t of primary alumin-
ium produced whereas on average smelters
consume 14.5-15 MWh/t. Many smelters have
variable power costs, when rates are a fixed
percentage of the LME aluminium price.
Cost trends in some
major producing regions
CHINA: Smelters in China have been known
as occupying the very top of the cost curve,
but pinpointing the exact position of the coun-
try’s giant aluminium sector on the global cost
curve is no easy task – because Chinese smelt-
er costs are variable, as higher-cost capacity
gradually closes in the east of the country and
is replaced by lower-cost capacity in north-
western provinces. New production capaci-
ties are set up with more efficient technology
while inefficient and costly smelters in the east
are closed.
As China is building up capacity at lower
costs, it is likely that aluminium prices will
come further under pressure in view of the
current economic situation. Moreover, alu-
minium smelters in China’s major producing
regions – such as Henan province, accounting
for about 20% of the countries smelting ca-
pacity of over 23m tonnes – receive govern-
mentally approved discounts on power of 0.08
yuan/KWh (1.265 US cents/KWh), a move
that could delay production cuts and keep
prices down. “Smelters will continue to pay
preferential rates until the aluminium price
reaches 17,500 yuan/t (USD2,767/t), and if
it’s above 18,000 yuan/t (USD2,846/t), they
will pay back the 0.08 yuan preferential rate,”
according to SMM Information & Technol-
ogy. The subsidy will cut production costs for
Aluminium smelter cost structure, 2011
Endangered primary smelters Blue: mainly due to the existence of long term contracts
EAA
CRU

4. ALUMINIUM · 7-8/2012 31
smelters by around 1,000 yuan/t (USD158/t),
local sources say. News of the subsidy dragged
the most-active October aluminium contract
on the Shanghai Futures Exchange (SHFE)
down as much as 3.38% to 14,990 yuan/t
(USD2,370/t) at the end of June, the lowest
since April 2009.
Aluminium is “attractive at these levels”
of the price with 20% of China’s production
losing money, says Goldman Sachs Group. Up
to 30% of the aluminium output outside of
China is “loss-making”, Goldman Sachs said
in a report early in July.
According to the Chinese Aluminium As-
sociation, in the provinces Henan, Sichuan,
Yunnan and Guizhou and Guangxi Zhuang
autonomous region,the power tariff for smelt-
ers (prior to the government’s discounts on
power costs) is more than 0.6 yuan/KWh (9.5
USc/KWh), which raises production costs of
aluminium up to 18,400 yuan/t (USD2,909/t).
However, despite losses, there are few com-
panies that plan to curtail output. In other
regions, most smelters pay 0.45 yuan/KWh
(7.1 USc /KWh), which results in cost of pro-
duced tonne of aluminium of 16,400 yuan
(USD2,593/t).
EUROPE: There are a number of smelters
in Europe at high risk to be closed due to high
power prices after old power contracts expired
and Germany decided to close its nuclear
plants by the end of the decade. Especially
under threat are smelters in Germany, south
and south east Europe.
In purpose to prevent further closures, the
European Commission decided in May that
EU countries will be allowed to compensate
some big energy users, including alumin-
ium producers, for extra costs resulting from
changes to the EU Emissions Trading Scheme
(ETS) as from next year. A recent draft has
already shown that EU member states would
be allowed to shield big industries as from
2013, to prevent so-called carbon leakage,
which happens when rising costs could drive
business out of Europe. “If production shifts
from the EU to third countries with less en-
vironmental regulation, this could undermine
our objective of a global reduction of green-
house gas emissions,” Competition Commis-
sioner Joaquin Almunia said in a statement.
RUSSIA: UC Rusal had production cash
costs of USD1,950/t in the first quarter of
2012, according to a company’s official. In
order to further cut costs it delayed the con-
struction of the Taishet smelter (750,000 tpy),
which was expected to produce first metal
in 2013. The declining aluminium price also
helped Rusal to cut costs since its energy sup-
ply contracts are linked to the LME price.
Rusal has long term contracts to supply power
from low cost hydro power plants in Siberia.
Electricity accounts for about 20% of the
company’s production costs. A weak Russian
rouble and lower oil prices have also contrib-
uted to cost reduction in the second quarter of
this year. This means that, at current alumin-
ium prices, Rusal’s production costs are lower
than USD1,900/t. However, due to higher
power rates recently introduced, which did
not exempt the Russian aluminium industry,
Rusal’s power costs recently increased and are
expected to further rise in coming years. In
2010 the Bratsk smelter had the lowest power
tariff in Russia, of around USD13.3/MWh, ac-
cording to Brook Hunt data.
CANADA: Canada is a country with plenty
of low cost energy and home of several smelt-
ers with the lowest power costs in the world,
mostly generated from hydro power plants.
The Kitimat smelter (200,000 tpy) has the low-
est power tariff of USD5.3/MWh, followed by
Alma, Grande Baie, Shawinigan and several
other smelters with power tariffs of USD6.8/
MWh, again according to Brook Hunt.
A recent CRU study entitled Primary Alu-
minium Smelting Cost concludes that produc-
tion costs at Rio Tinto Alcan’s Alma smelter
(438,000 tpy) was approx. USD1,442/t in
2011, whereas the lowest production costs in
China was USD2,085/t. Based on production
costs, the Alma plant ranks 27th in the world
out of 176 smelters surveyed by CRU, and 7th
out of 19 in North America. The Alma smelt-
er operates with two third of its full capacity
since the beginning of 2012 and will soon re-
turn to full capacity after a tentative settlement
was reached in July, ending a 6-month labour
dispute.
Production cuts with no effect so far
Aluminium producers around the world, ex-
cluding China, have cut production by around
1.3m tonnes since the summer 2011. Still,
latest data from the International Aluminium
Institute show that global production (ex. Chi-
na) for the first five months in 2012 amounted
to 10.404m tonnes, against 10.532m tonnes
during the same period last year, a decrease of
1.2% y-o-y. The statistics of IAI, which start-
ed in 1973, show that the historic maximum
of the global aluminium production was 71
tonnes/day in October 2011.
In China, average daily volume of the alu-
minium production by the end of May 2012
reached a new historic record with 54.1 tonnes/
day (IAI statistics). For the first five months in
2012,primary aluminium production in China
reached 7.838m tonnes against 6.995m tonnes
Costing methodology
according to Brook Hunt
Cash cost (C1) represents the cash cost incurred at
each processing stage, from the start of production
process to delivered metal to market, minus net by-
product credits (if any). The M1 margin is defined as
aluminium price received minus C1.
Production cost (C2), also known as operating
cost, is the sum of cash costs (C1) and depreciation,
depletion and amortisation. The M2 margin is de-
fined as aluminium price received minus C2.
Fully allocated cost (C3) is the sum of the
operating cost (C2), indirect costs and net interest
charges. The M3 margin is defined as aluminium
price received minus C3.
Business costs are the sum of all costs (variable
and fixed) in a particular business function of the
value chain.
CRU defines business costs as sum of site costs
and realisations costs. Site costs comprise raw mate-
rial and conversion costs. Raw material costs include:
royalties (mines), raw materials (smelters) and
financing of raw material stocks. Conversion costs
include: energy costs, labour, consumables, mainte-
nance, plant management, financing of VIP, stores
etc, and sustaining capital expenditures. Realisations
costs include: sales and marketing costs, freight to
markets, premium/discount adjustment and financ-
ing of inventory/receivables.
According to CRU, C1 costs consist of: energy
costs, labour, raw materials, consumables, mainte-
nance, mine/plant management, freight to markets,
and sales and marketing costs.
during the same period last year. Thus, from
the beginning of the year aluminium produc-
tion in China rose 12.1% y-o-y.
These figures show that despite the closure
of around 1.3m tonnes of annual production
since the summer 2011, newly started pro-
duction capacities, especially in the Middle
East and India, have compensated alumin-
ium production losses. China has cut around
1m tonnes of unprofitable production, but
pro­duction from January to the end of May
2012 has increased by 0.85m tonnes y-o-y –
in other words: China added almost 2m
tonnes of new production over that period.
The aluminium price has not got much
support by production cuts so far, and at least
3m tonnes of annual production has to be
taken off the market to back and stabilise the
price above USD2,000/t.
Final remarks
The aluminium industry is going through a dif-
ficult time again, with many smelters around

5. 32 ALUMINIUM · 7-8/201232 ALUMINIUM · 7-8/2012
the world struggling to survive in view of
weak aluminium prices both on the LME
and Shanghai Futures Exchange. There is a
trend towards smelter concentration in the
low-cost Gulf region and smelters in China
moving from higher cost eastern provinces to
lower cost provinces in the West and North-
west.
World smelters production costs are expected
to gradually decrease from the 2011 level by
the end of this decade, as new and cheap pro-
ducing capacities will replace old and high cost
smelters. Production costs, together with the
aluminium price, will grow only in extreme
situations of political tensions or natural dis-
asters, when supplies are interrupted (raw
materials, energy, shipping routes). However,
bauxite and alumina prices will most likely in-
crease in coming years but the alumina price
should not exceed values already seen in the
past. Higher alumina costs will be offset by
lower other costs (energy, labour) resulting in
stable or decreasing total smelters’ production
costs.