Aluminum smelters in Spain and Germany are under threat of closure due to low London Metal Exchange prices, high power costs and excessive regulation, an industry analyst said, reinforcing concerns about the future of the region's producers. Europe's strict labour and environmental laws and high energy costs have made it unprofitable to produce primary metal in the region, Citigroup's director of metals research and strategy David Wilson said at Platts aluminium symposium this week.

"I think we'll see Spanish and German smelters close this or next year," he said at the Platts aluminium symposium. "There's no reason to produce aluminium in Europe." Production in Europe will fall to 2 million tonnes this year, the lowest since 1971, Wilson predicted. That is a small fraction of global output of about 50 million tonnes.

The bleak outlook will likely intensify calls for the European government to introduce measures to save the struggling industry as production increases in Asia and the Middle East. At the end of last year, Aluminium Delfzijl (Aldel), the last remaining smelter in the Netherlands, with annual capacity of 110,000 tonnes, applied for bankruptcy after failing to negotiate an energy deal.

It will also increase fears about dwindling regional supplies among Europe-based end-users, who buy aluminium to make cars and cans. Consumers have fought for years to get Europe to ditch import duties on primary aluminium. France's smelters are less vulnerable due to its access to nuclear power, he said. Power accounts for about a third of the cost of producing aluminium. The US oil and natural gas shale revolution has cut power prices, giving some relief to American producers.

Even so, smelters there still struggle to compete with lower-cost capacity in the Middle East. The Middle East has emerged as a major production hub over the past five years. It will produce almost 5 million tonnes this year, up almost a third from 2008, according to Walid Al Attar, executive vice president of marketing and sales for producer Dubal/Emal. More production cuts are needed though to help eat into the massive stockpile and revive prices that have fallen to below the cost of many smelters' production, analysts say.

Cash LME prices were just above $1,700 per tonne on Tuesday and even with the hefty regional premiums paid on top of the benchmark for physical delivery, most plants are under water, Wilson said.

China, the world's biggest producer, continues to raise output, offsetting cuts by Western producers like Rusal and Alcoa, market participants say. "We've not seen the output cuts the market really needs," he said. China increased output by almost 10 percent in the first 11 months of last year, while Western producers cut capacity by 2 percent.