Rio Tinto’s plan to divest up to 13 separate aluminium, alumina and power facilities is move aligned with a strategy that is focused almost exclusively on slashing production costs, and that is now becoming more of a priority among other producers as the aluminium price falls closer towards $2,000 per tonne.

Rio Tinto’s plan to divest up to 13 separate aluminium, alumina and power facilities is part of a strategy that is focused on slashing production costs, an issue that is becoming more of a priority among other producers as the aluminium price falls closer towards $2,000 per tonne.

“People are definitely getting wary of London Metal Exchange prices, and given their experience from before no one is saying that something isn’t possible,” a producer said.

“Once the price starts going to $2,000 per tonne, people will no doubt start having big discussions" about closing smelters.

That same producer told MB in September that he would “only be concerned with the price if it falls so much that we start closing smelters”.

Three-month aluminium settled at $2,147/148 per tonne in the official session on the London Metal Exchange on October 20, down from $2,436/437 at the start of September and a 2011 peak of $2,772/774 on April 28.

Analysts at Soci�t� G�n�rale recently pegged the 90th percentile of primary aluminium production costs at $2,300-2,400 per tonne, considerably higher than the current LME price. It was thought that high production costs would limit price falls.

“With marginal costs at such levels, it is difficult to envisage sustained downward price moves from current levels in the absence of an extreme macroeconomic shock,” SocGen analysts said in a report published in September.

Rising power tariffs are the chief driver of increased aluminium production costs, with Chinese smelters paying among the highest global prices for their power supply.

United Co Rusal estimates that power costs account for around 30% of total production costs, and that producers in China have to pay over $1,000 per tonne of aluminium produced to source power.

In Europe, where a lot of aluminium production uses hydroelectric energy, power costs average around $700 per tonne of aluminium produced, while US producers pay around $550 per tonne of aluminium, according to Rusal.

The lowest power tariffs paid by aluminium producers are found in Canada, with around $320 per tonne of aluminium, and the Middle East, where producers pay around $300 per tonne of metal.

The 13 assets put up for sale by Rio Tinto do not include any of its Canadian operations.

While many people have commented that the sale of largely ex-Alcan assets is an indication that Rio’s acquisition of Alcan at the top of the market has not been a stellar success, Alcan had the value it had because of its Canadian assets—arguably the best in the industry.

“[The decision] was made following a strategic review as it was determined that the identified assets are no longer aligned with our strategy of operating long-life, cost-competitive, large-scale assets,” a Rio spokesman said.

Though no other company has yet to go so far as to put its higher-cost facilities on the auction block as Rio has, sources among the large producers reported a recent spike in cost-cutting measures throughout their companies’ activities.

“Companies are starting to adjust from the cost side due to the deteriorated economic situation,” the producer said. “New hires have to be approved at a higher level; travel expenses are looked at more closely; and lots of other little things on an administrative level.”

Should the economic situation continue to deteriorate, and aluminium prices continue to fall, higher-cost smelters could be forced to halt production due to financial pressure. That would give a significant opportunity to lower-cost facilities, such as those in the Middle East and Rio’s smelters in Canada.