Aluminum giant Alcoa gets into jet engine parts business

Alcoa hopes to cash in on the boom in commercial aircraft orders by building a new plant that will make engine parts for big jets.

Company officials announced Thursday that they will build a $100 million plant in La Porte, Indiana, to make nickel-based engine parts for commercial airliners. Alcoa already makes the same components - in smaller sizes - for engines that go on business jets and planes flown by regional airlines.

Boeing and Airbus are stepping up production as airlines order new, more fuel-efficient planes. Asian airlines in particular are expected to grow rapidly as a booming middle class yearns to travel.

"This is a massive growth market, more than 8 years of backlog," CEO Klaus Kleinfeld said in an interview. Alcoa expects the aerospace industry to grow by 8 percent to 9 percent this year.

Airlines have long gone through a boom-and-bust cycle, but Kleinfeld said he wasn't worried about that. He said smarter management and Asia's changing demographics will help the airlines.

The Indiana plant will make parts that form the rib cage around a jet engine's vital parts, so its customers are likely to be the big engine manufacturers such as GE and Rolls Royce. Alcoa wouldn't disclose customers, but said it has enough long-term contracts to support the facility, which is due to be completed late next year and eventually employ 329 workers. Alcoa said it could get up to $4 million in state tax credits for job creation and another $7.1 million in city tax incentives over 10 years.

The plant is part of Alcoa Inc.'s strategy to downplay its roots as a mining and aluminum-smelting company, which includes a large smelter near Goose Creek. Aluminum prices haven't recovered from the deep recession in 2008, and Alcoa has been idling smelters to reduce capacity and cut costs.

The company has been increasing its focus on producing finished aluminum products for aerospace, autos and other industries. Those segments account for more than half of the company's revenue and three-quarters of its after-tax operating income.

Nyrstar Decides To Close Its Zinc Plant

The Zinc plant at the Nyrstar smelter will shut down which will costs around 124 jobs by the end of 2016. However, there is great hope for future growth. The plant closure is a business decision as the plant has been making a great loss. There will be no forced redundancies, but the 124 employees now at the zinc plant will not be replaced.

Two week ago, positive news about Nyrstar reported that the company would invest around $514 million for the plant enhancement with the support of the State Government. Amid this, the news relating the plant closure came. The redevelopment is scheduled to finish by 2016 and it is reported that around 400 jobs would be created in the construction phase, but it is not yet clear about the overall job gains and losses.

On Wednesday night, the Chamber of Commerce and Industry networking forum at the golf club discussed about the subject concerning the job loss due to the closure of the zinc plant. Bertus de Villiers, Nyrstar vice-president for metals refining confirmed that the 120 plus workers would affect by the decision of closure and they would be redeployed, but their positions would not be filled.

He said that the decision to close the plant is basically a business decision as it had been making loss of around $20 million for the last four years. He added that it was a difficult but necessary decision and they were able to do this without taking the process of forced redundancy and were not affecting the employees by this negative decision. He added that the plant would run for another two months and of if they could make this things work, there would be plenty of opportunity for growth. 

Strong demand outlook to lend support to aluminum prices in 2015

The aluminum oversupply will be offset by strong demand growth outlook, lending support to aluminum prices in 2015, says a recent study report by Capital Economics.

The addition of capacities in the Middle East and China has lead to surplus in aluminum market. Aluminum production by China grew 6% in 2013. The production growth is expected to reach 10% in China this year.

According to Capital Economics, the increased supply of aluminum will be offset by the rising aluminum demand from traditional consuming sectors. The recovering automotive and construction sector in the developed world, especially the US looks positive for aluminum. Also, the rise in production of consumer goods from China will keep the aluminum demand high.

Further, the supply surplus will reduce considerably in 2015 as China curtails production at non-performing smelters. Major aluminum producers elsewhere have announced production cuts. The US –based Alcoa plans to cut one-fifth of its capacity by 2015.

The report forecasts that the aluminum price is likely to reach $2,000 per mt by end-2015, which is nearly 12% higher than the current LME price for the metal.

Participation of banks in commodity markets long overdue

They enable even small farmers to reap the benefits of hedging

Banks are not allowed to participate in the Indian commodity derivatives markets. Such non-participation of the most important financial institution of the country – banks – is an important missing link in the evolution of this market in India.

While much has been talked about in various contexts recommending banks’ participation, the latest Report of a Finance Ministry committee suggesting steps to fulfill the objectives of price discovery and risk management in the commodity derivatives market, says: “… One way to reduce the cost of capital for the commodities trader is, to make banks … an integral part of trading in commodity derivatives.”

It is a fact that there are regulatory restrictions on part of banks too that restrict their participations in commodity futures markets. But, the fact remains that their participation in commodity exchanges is a win-win situation for all: it helps the banks, it helps commodity markets,and in the process, it helps the economy as a whole.

Risk management platform

While the above-mentioned report recognises that banks’ participations in the commodity derivatives market will contribute to the depth and width of the market, what this process also contributes to is the availability of an unparalleled risk management platform for the banks themselves, as banks also need to manage risks arising from commodity price volatility.

Thanks to globalisation of the Indian economy and business expansion of Indian banks, their exposure to rising commodity price volatility is significantly high – 19 per cent according to some estimates made in 2011-12. Yet, while banks have been allowed to manage other risks in their portfolios, they do not have any mechanism to hedge commodity price risk in an effective and transparent manner, barred as they are from entering the commodity derivatives market.

Intermediation, aggregation

Further, banks can act as intermediaries and aggregators, facilitating the risk management actions of farmers and other small players who on their own may find considerable barriers to enter this market. World-over, there are examples galore on banks’ participation in exchange-traded commodity derivatives market on behalf of farmers, enabling the latter manage risk exposure better and increase their incomes.

Mention may be made of Rabobank’s intervention in Tanzania and Nicaragua and Banco do Brasil’s intervention in the Brazilian agricultural market through issue of exchange-traded Cedula Producto Rural contracts. Many of these interventions are made through designing and offering customised hedging solutions fulfilling the requirements of farmers.

Besides, by aggregating small participants, banks enable even small farmers to reap the benefits of hedging. On a similar note, the non-farm sector, especially the small and medium enterprises, too can be a significant beneficiary of the commodity futures market, which can be increased manifold by the facilitative role provided by banks.

Releasing scarce resources

At the micro level, with a comprehensive risk management policy that encompasses commodity price risks, banks’ financial and human resources can be freed to cater to more important strategic functions. Under the evolving international regulatory regime where norms on credit and provisioning are increasingly being linked to risk assessment of banks’ portfolios, hedging against commodity price movement will actually contribute to freeing of financial resources – enabling not just achievement of priority sector targets for Indian banks, but also their overall business expansion.

Through focused deployment of appropriate credit products, these developments could, at the macro level, go a long way in smoothening and quickening the credit cycle, thereby enhancing productivity of credit.

Better liquidity, hedging

From the commodity market’s perspective, banks’ participation will help in providing the market with the much-needed long-term traction. This will help the long-term hedgers’ participation on the one hand, by reducing the overall costs of transactions (including the impact costs), and will help enhancing the hedging efficiency. There has often been a complaint from large corporates about lack of long-term traction in the Indian comexes, which inhibit their hedging efficacy. Banks’ participation will help ameliorate that concern.

A “Pareto” Improvement

Here lies the “Pareto” improvement through banks’ participation in Indian comexes. On the one hand, it will be in the interest of banks’ own sustainable growth.

On the other hand, it will help them achieve the goal of inclusive growth through market inclusion of millions of commodity producers. Thus, banks’ participation in the commodity derivatives market does not stand as a policy option; it is a fundamental economic need of the day that is long overdue

Barclays changes view on Indian Rupee after election

Barclays calls the Indian rupee one of its favorite high-yielding emerging-market currencies. The bank now sees the Indian currency at 58 rupees to the dollar in one and three months, compared to 60 previously. 

Barclays said that its more constructive rupee view reflects a combination of supportive factors including, an election result has encouraged portfolio inflows, a narrowing current account deficit and a globally supportive environment for carry trades. 

“Central-bank intervention will likely continue to limit the pace of INR appreciation against the USD, but the large size of portfolio flows implies that modest appreciation is likely to be tolerated by the RBI (Reserve Bank of India), in our view,” said Barclays. 

Barclays continues to think that a renewed bout of INR depreciation is unlikely, given the much-improved fundamental backdrop, led by a markedly smaller current account deficit, higher FX reserves, largely range-bound inflation and enhanced RBI policy credibility.

Rupee was as muscular as 69.22 rupees back in August, and the weak Indian currency at the time was one of the factors – along with gold-import restrictions-- blamed for reduced gold buying in the country, since a weak rupee makes gold more expensive for Indians.

Societe Generale remains bullish on Zinc

Many market participants in the base-metals arena looked favorably upon zinc, said Robin Bhar, metals analyst with Societe Generale. 

“It is anticipated that recent and expected closures of a number of zinc mines over this year and next would lead to a supply crunch underpinning a rally in prices,” said Bhar, outlining factors discussed at a recent zinc conference in Istanbul. Bhar cited closures and expected closures in Canada, Ireland and Australia. 

However, mine closures are the only known certainty. There are many unknowns regarding zinc’s supply/demand fundamentals, such as demand growth, substitution, how much higher prices would incentive new projects and the Chinese mining sector. 

“A supply crunch does look inevitable but it’s likely magnitude and duration is highly uncertain and subject to a variety of factors,” Bhar added.

Chart Of The Day: Global Youth Unemployment

We have some bad news... for Africa: according to the latest data released by the International Labor Organization, your youth unemployment problem is almost as bad as that of Europe.

Maybe more to the point, just what is it about those bracing Mediterranean sea breezes (not to mention mandated Eurozone "political capital" and relentlessly liberating - of one's job - globallization) that makes the young people in the adjoining countries choose to do pretty much anything but work?