March 14, 2012 / 7:33 PM / 5 years ago

UPDATE 1-Norsk Hydro postpones alumina project in Brazil

(Updating with comment, more details)

March 14 (Reuters) - Norwegian aluminum group Norsk Hydro has delayed the construction of its planned CAP alumina refinery in Barcarena in Brazil due to concerns about the short- and medium-term demand, the company said in a statement on Wednesday.

The decision to postpone the start of building comes after a fall in alumina prices to levels which are below breakeven for higher-cost producers due to lower demand from aluminum smelters.

It also comes just a year after Hydro bought Vale's upstream aluminum assets in Brazil in a deal which was worth about $5 billion and gave it a long position in alumina and bauxite.

"The main reasons for the postponement of the CAP project are the uncertainty related to short- and medium-term aluminum supply/demand balance and the development in the world economy," it said.

The Vale deal increased Hydro's stake in the CAP project to 81 percent and its stake in the world's largest alumina refinery, Alunorte, also in Brazil, to 91 percent. That plant has capacity to produce over 6 million tonnes per year.

Once built, CAP would have initial annual capacity of 1.86 million tonnes, although the project has an expansion potential up to 7.44 million tonnes per year, with bauxite supply primarily from Paragominas, also in Brazil, Hydro has said previously.

The refinery was scheduled to start production in 2015.

A year after sealing the deal, alumina market conditions have taken a turn for the worse. Spot prices are around $315 per tonne, down from above $400, according to traders, who attribute the fall to smelter capacity cutbacks and lower London Metal Exchange prices.

Hydro still believes in its strategy to expand in aluminum smelting raw materials.

"The decision to postpone the CAP project does not reflect any changes in our-long term faith in the market for alumina and aluminum or the CAP project," said Executive Vice President Johnny Undeli, head of Hydro's bauxite and alumina operations, in a statement.

"Economic developments in a number of countries, not least in Europe, have led to lower production volumes than expected at our customers," he said.

In the immediate term though, aluminum output cuts have pushed higher cost refineries into the red, with market participants expecting refineries to cut output.

"You've got 20 percent of the industry losing money" at $300 per tonne, said Tim Hayes, analyst at Davenport & Co.

The Alunorte refinery is one of the lower cost refineries, Hydro has said. Production in Jamaica is estimated to be at the higher end of the cost curve.

Global smelting output had fallen 2 million tonnes on an annualized basis to 43.1 million tonnes by the end of January after peaking in September, according to Hayes.

Those cuts have removed some 4 million tonnes of alumina demand.

The bulk of that smelting cuts were in China, although output fell by 300,000 tonnes in Canada, where two Rio Tinto Alcan smelters, Alma and Shawinigan, have been hit by production issues. (Reporting By Victoria Klesty and Josephine Mason; Editing by Bob Burgdorfer)

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