This Company Invests in New Tech as Industry Falters… Why?

New technology boosts profitability at aluminum producer.

Throughout the manufacturing industry the price of raw materials are a dominant component of overall cost of production – especially when it comes to nonferrous metals such as aluminum.

It’s hard not to love aluminum for its versatility and light weight, but it has its disadvantages. It can be difficult to form, requiring some over-bend to counteract spring-back, but the worst part is its price tag.

Aluminum is smelted and refined electrolytically, making it a very energy intensive process. Steelmaking uses a lot of energy too, but with reasonable access to metallurgical coal for coking, you can build a steel mill almost anywhere.

Aluminum refining requires lots of electricity and this restricts economically sound facility locations to only a few regions on the planet. Market prices for alumina (precursor for aluminum metal) are depressed and as a result major supplier Alcoa is pursuing an aggressive cost-cutting campaign.

Recently, Alcoa announced the company is permanently closing its Poços de Caldas primary smelter in Brazil. The closing of this smelter reduces Alcoa’s overall capacity by 96,000 metric tons, bringing Alcoa to a total capacity of 3.4 million metric tons.

While Alcoa is trimming production capability, Rio Tinto Alcan is kicking off production from a newly modernized smelter in Canada.

“Positioned in British Columbia on the west coast of Canada, Kitimat is well placed to serve rapidly growing demand for aluminum in the Asia-Pacific region and to serve the North American market,” said Alf Barrios, aluminum chief executive.

The modernisation of the aluminum smelter will increase production capacity by 48 percent. The Kitimat smelter may in fact be the lowest cost smelter in the world. Rio Tinto is now focused on ramping up towards its annual production rate of 420,000 tonnes.

So how does Rio Tinto make money in a world where Chinese capacity and global recession have suppressed prices? The key is energy. Rio Tinto owns a technology company which produces a proprietary technology firm called AP40.

AP40 reduces energy inputs and simultaneously halves the smelters overall emissions, but saving energy is only half the equation. The other half is a large hydroelectric power facility that Rio Tinto also owns nearby. The company expects to serve the Asia-Pacific region as well as the North American market with the new output.

“The modernisation of Kitimat will fundamentally transform its performance, moving it from the fourth quartile to the first decile of the industry cost curve,” added Barrios. “At full production, Kitimat will be one of the most efficient, greenest and lowest-cost smelters in the world.”

So one major producer adds capacity, while another reduces it. What does that mean?

This suggests that production efficiency, largely driven by automation, is beginning to disconnect from conventional notions of sales and profitability. In the old model, strong sales and high profitability meant cash to reinvest in process productivity. Recession put those plans on hold.

Today, it’s different. In a declining market, hanging on to market share requires significantly lower production costs. Now that the low-hanging fruit delivered by statistical process control and basic process automation has been picked, there’s no choice but to move to innovations like Big Data and robotics. Historically low interest rates help, but the message is clear: if you’re a manufacturer who’s facing declining sales and productivity, this isn’t the time to put modernization plans on hold, it’s exactly the opposite.

For Rio Tinto Alcan, the current market price for aluminum is largely irrelevant. By creating one of the lowest cost smelters in the world, profitability is essentially assured – there’s a big difference between earning smaller profits in a recessionary market compared to losing money. It’s not a question of whether you can afford modernization, but rather can you afford not to?

Written by

James Anderton

Jim Anderton is the Director of Content for ENGINEERING.com. Mr. Anderton was formerly editor of Canadian Metalworking Magazine and has contributed to a wide range of print and on-line publications, including Design Engineering, Canadian Plastics, Service Station and Garage Management, Autovision, and the National Post. He also brings prior industry experience in quality and part design for a Tier One automotive supplier.