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The Aluminum
Industry CEO
Agenda, 2013–2015
Understanding the Challenges
and Taking Action
The Boston Consulting Group (BCG) is a global management consulting firm and the world’s
leading advisor on business strategy. We partner with clients from the private, public, and not-for-
profit sectors in all regions to identify their highest-value opportunities, address their most critical
challenges, and transform their enterprises. Our customized approach combines deep in­sight into
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The Aluminum
Industry CEO
Agenda, 2013–2015
Understanding the Challenges and Taking Action
June 2013 | The Boston Consulting Group
Thomas Bradtke
Filiep Deforche
Roman Deniskin
Marc Gilbert
Ketil Gjerstad
Kai Gruner
dirk harlacher
Alexander Koch
Knut Olav Rød
2 | The Aluminum Industry CEO Agenda, 2013–2015
Contents
	 3	 INTRODUCTION
	 5	 WHAT CAUSED THE INDUSTRY’S CRISIS?
A Two-Speed World for Demand
The Rapid Growth of China’s Capacity
Misjudging China’s Expansion Plans
Sufficient Alumina and Bauxite Despite Resource Nationalism
How China Got into the Downstream Game
	16	 TAKING ACTION AT THE INDUSTRY AND COMPANY
		 LEVELS
Taking Concerted Action Globally and in China
Capturing Opportunities and Achieving New Levels of Business
Excellence
	26	 SETTING THE AGENDA ALONG THE VALUE CHAIN
Upstream: Pursue High-Value Opportunities in Bauxite and
Alumina
Smelters: Take Bold Actions to Ensure Long-Term Viability
Downstream: Capture New Upside Opportunities While
Safeguarding the Baseline
	28	 FOR FURTHER READING
	29	 NOTE TO THE READER
The Boston Consulting Group | 3
Aluminum is a metal characterized by abundance because of its
availability as a naturally occurring element and its use in every-
thing from sophisticated aerospace components to commonplace con-
sumer products. This characteristic extends to the industry that pro-
duces aluminum. While industry executives enjoy an abundance of
market opportunities for their product, they have also experienced an
abundance of severe challenges in recent years.
Analyses of the aluminum industry’s performance reveal the emer-
gence of significant issues that are likely keeping many aluminum-
industry executives awake at night. Chief among their concerns are
the sharp decline in company valuations and profits and the de-
pressed price of aluminum.
The market capitalization of the top international aluminum compa-
nies has dropped by about 65 percent over the past five years. Earn-
ings before interest and taxes margins have decreased by about 5 per-
centage points, a disturbing trend for an industry that’s among the
world’s most capital intensive. The copper industry needs to invest,
on average, $14,000 per ton of primary output from mine to metal,
compared with $8,000 per ton of aluminum for capital related to
mines, refineries, and smelters. However, if the value of the produced
metal is included in the calculation, aluminum is twice as capital in-
tensive as copper (as well as steel). As margins dwindle, the alumi-
num industry sits on a very expensive asset base that needs higher
profits to generate sufficient returns.
The decline in company valuations and profits was driven by a severe-
ly depressed price for primary aluminum. Compared with other met-
als, aluminum entirely missed the “commodity super cycle.” Since Jan-
uary 2000, the price of primary aluminum has increased by just 20
percent, compared with more than 100 percent for steel and almost
350 percent for copper. When adjusted for inflation, aluminum is ac-
tually valued below its 2000 price, which is especially striking because
prices for other raw materials have enjoyed a substantial premium in
recent years. The gap is even more dramatic for the feedstock for pri-
mary aluminum: prices for both bauxite and alumina have increased
by less than 20 percent since January 2000. In contrast, the price of
iron ore is more than 600 percent higher today (it was more than 900
percent higher at the postcrisis peak in late 2011), and the price of
metallurgical coal is about 250 percent higher.
To reignite the value creation engine and restore investor confidence,
aluminum industry CEOs and their management teams must develop
INTRODUCTION
4 | The Aluminum Industry CEO Agenda, 2013–2015
and implement compelling action plans that will turn around the in-
dustry. Executives need a deep understanding of what caused the alu-
minum industry’s crisis in order to develop a meaningful and deploy-
able CEO agenda that addresses current challenges and captures new
opportunities. These are the key questions:
Why did aluminum miss the commodity super cycle?••
Is the industry’s crisis temporary, or does it reflect a long-term••
structural change?
To guide future actions, what could aluminum companies have••
done differently in recent years to avoid or mitigate the industry’s
performance issues?
What strategies will be most effective to get the aluminum indus-••
try back on track?
What specific actions should aluminum executives push forward in••
their companies?
Below we answer these questions and propose specific actions that
aluminum executives can take—providing an aluminum industry
CEO agenda for 2013 to 2015. By understanding the root causes of
the crisis and taking the right actions to respond, aluminum industry
executives have an opportunity to change their luck with element
number 13.
The Boston Consulting Group | 5
To identify the underlying causes of
the current crisis, we examined the
challenges and outlook for the demand and
supply of primary aluminum and the up-
stream and downstream segments of the
value chain. (See Exhibit 1.)
Our analyses show that the industry’s crisis
cannot be traced back to an unexpected drop
in demand caused by the global economic
downturn or to sudden, surprising changes in
the upstream or downstream segments of the
value chain. Instead, the crisis arose from the
supply side, driven by China’s strategy to in-
crease its capacity for producing primary alu-
minum. Producers in the rest of the world did
not predict China’s moves and did not respond
with sufficiently rapid strategic adjustments.
WHAT CAUSED THE
INDUSTRY’S CRISIS?
• Chinese demand has grown at a rate of almost 16% per year since 2000 (now 45% of global
demand), while growth in the rest of the world has been only slightly above 1% per year
• Outlook: China will continue to drive strong growth; demand is expected to expand by 8% to 9%
per year, versus 1% for the rest of the world
• Oversupply led to huge physical inventories aer the economic crisis (more than 10 million metric
tons in 2012)
• Despite higher costs, China remained self-sufficient—while the rest of the world expected it to
increase imports
• Outlook: China will remain self-sufficient, overcapacity will increase in the rest of the world,and
the LME price will remain low because of supply-demand imbalance and high warehouse stocks
• China has been self-sufficient in alumina, and bauxite is plentiful—thus, Chinese demand has not
driven prices higher
• Outlook: China controls the value chain, imports will partially shi from bauxite to alumina, and
prices will rise moderately as new supply regions—such as Vietnam and Laos—are developed
• Chinese exports have increased by approximately 28% per year since 2000, reducing primary-
aluminum demand in the rest of the world
• Lower processing costs have offset China’s disadvantage in primary aluminum
• Outlook: Chinese exports will continue to rise but likely at a slower rate of 4% to 9% per year
Demand
Supply
Upstream
Downstream
Source: BCG analysis.
Note: LME=London Metal Exchange.
Exhibit 1 | Challenges and Outlook for the Global Aluminum Industry
6 | The Aluminum Industry CEO Agenda, 2013–2015
A Two-Speed World for Demand
Since 2000, primary aluminum has experi-
enced particularly strong global growth in
demand—nearly 5 percent per year. This
is a significantly higher rate than that of
global GDP during the same period and
twice as strong as the metal’s average de-
mand growth rate of 2.4 percent during the
preceding 30 years. Aluminum’s annual de-
mand growth since the turn of the millenni-
um has outpaced that of copper (2.6 per-
cent) and is similar to that of finished steel
(5.3 percent).
But a purely global perspective does not re-
veal the most critical fact about demand:
global consumption has been driven almost
entirely by China, resulting in a “two-speed
world” of aluminum consumption. Primary-
aluminum consumption in China has grown
at a rate of almost 16 percent per year since
2000, while growth in the rest of the world
has been only slightly above 1 percent per
year. (See Exhibit 2.) The differential was es-
pecially apparent during the global financial
crisis. In 2009, consumption outside China
dropped by 17 percent, whereas Chinese con-
sumption increased by 15 percent. This
growth was driven by China’s massive invest-
ments in real estate and infrastructure, as
well as by private consumption and exports
of manufactured goods containing alumi-
num. As a consequence, China’s share of
global aluminum demand increased from 14
percent in 2000 to 42 percent in 2011. Its
share is expected to have reached approxi-
mately 45 percent in 2012. The two-speed
pattern for demand in China versus the rest
of the world also holds true for copper and
steel.
The industry has failed to
translate a demand surge
into higher prices or profits.
As is the case for other basic-materials in-
dustries, the aluminum industry has enjoyed
a super cycle on the demand side. But in
contrast to most of its peer industries, it
has largely failed to translate that demand
surge into higher prices or increased profit-
ability.
Aluminum demand compared with other metals Metal demand by region
0
190
170
150
130
110
90
2012E
Finished steel
185% (5.3% per year)
Primary aluminum
177% (4.9% per year)
Primary copper
136% (2.6% per year)
2010
2008
2006
2004
2002
2000
Demand (%,
2000 = 100)
600
500
400
300
200
100
0
Demand (%,
2000 = 100)
2012E
Finished steel
515% (14.6% per year)
Primary aluminum
116% (1.2% per year)
Primary aluminum
562% (15.5% per year)
Primary copper
89% (–1.0% per year)
Primary copper
468% (13.7% per year)
2010
2008
2006
2004
2002
2000
China
Rest of the world
Finished steel
121% (1.6% per year)
Sources: World Bureau of Metal Statistics; World Steel Association; BCG analysis.
Note: 2012 values have been annualized based on the first eight months for aluminum and copper according to the October 2012 World Steel
Association short-range outlook for steel.
Exhibit 2 | Strong Demand Growth in Aluminum Is Driven by China
The Boston Consulting Group | 7
Given the substantial benefits of aluminum
and its use in key growth sectors such as
transportation equipment, infrastructure, and
consumer products, demand is expected to
remain strong in the long term. Trends such
as rising fuel prices and concerns about car-
bon dioxide emissions, for example, are likely
to accelerate the substitution of aluminum
for steel in the automotive industry. And due
to the strong price increase in copper, alumi-
num has recently begun to be used as a sub-
stitute in selected electrical applications.
We expect global primary-aluminum demand
to grow at an annual rate of 4 to 5 percent
during the next five to ten years. This strong
growth will continue to be driven by China,
where demand is expected to expand by 8 to
9 percent per year. Demand growth in the
rest of the world will likely be approximately
1 percent per year. In 2017, global demand
for primary aluminum will reach 55 to 57 mil-
lion metric tons (MMT) according to this fore-
cast, with China consuming 28 to 30 MMT, or
51 to 53 percent, of global demand.
China’s role as the growth engine of global
aluminum demand does, in principle, present
a great opportunity for the industry—but the
country is also a major pain point. Its sub-
stantial increase in demand triggered the de-
velopment of massive Chinese production ca-
pacity—a phenomenon that did not occur
with other commodities in China. This ex-
panding Chinese supply is at the root of the
global aluminum crisis.
The Rapid Growth of China’s
Capacity
In the second quarter of 2007, demand and
supply for primary aluminum were still in
balance. (See Exhibit 3.) The effective global
smelting capacity was 37.9 MMT, and global
consumption was 35.7 MMT, equal to 94 per-
cent of capacity. At the height of the econom-
ic crisis in the second quarter of 2009, con-
sumption was largely unchanged, but global
capacity had increased to 44 MMT, reducing
the ratio of consumption to capacity to 81
percent. Although the ratio rose to 85 per-
cent globally in 2011, there is a stark contrast
between China and the rest of the world.
The ratio fully recovered to 94 percent in
China, but was only 80 percent in the rest of
the world.
… leading to oversupply,
especially outside of China…
…and resulting in high warehouse
stocks in the rest of the world
2011
41.3
48.3
2009
35.8
44.0
2007
35.7
37.9
Consumption (averaged with previous year)
Capacity (second quarter)
Overcapacity occurred
during the economic crisis…
Consumption as a percentage of capacity
2011
16.7
17.8
2009
13.415.0
2007
10.511.2
2011
24.5
30.5
2009
22.4
29.0
2007
25.226.7
MMT
94 77 80
94 81 85
94 89 94
MMT
MMT
0
2,000
4,000
LME price
($thousands)
RoW warehouse
stocks1
(MMT)
8.0
6.0
4.0
2.0
0.0
7.3
LME priceRoW warehouse stocks
Rest
of the
world
China
0
2,000
4,000
SHFE price
($thousands)
SHFE warehouse
stocks (MMT)
2.0
1.5
1.0
0.5
0.0
January
2014E
January
2012
January
2010
January
2008
January
2006
0.4
SHFE priceSHFE warehouse stocks
January
2014E
January
2012
January
2008
January
2006
January
2010
Sources: Harbor Intelligence; World Bureau of Metal Statistics; London Metal Exchange; Bloomberg; BCG analysis.
Note: All prices are based on month-end value. LME warehouse stocks are based on month-end value. SHFE warehouse stocks are based on
month’s average. LME=London Metal Exchange; MMT=million metric tons; SHFE=Shanghai Futures Exchange.
1
Includes LME, Japan, and some producer inventories; not all third-party inventories are included.
Exhibit 3 | Sustained Oversupply of Aluminum Has Led to High Inventories
8 | The Aluminum Industry CEO Agenda, 2013–2015
Whereas China’s smelting capacity has
increased in tandem with its aluminum
consumption, supply and demand in the rest
of the world continue to be severely out of
balance. Instead of shutting down capacity on
a large scale (and thereby stabilizing prices),
smelters around the world continued to
produce. As a result, huge inventories of
aluminum have piled up in warehouses; 10 to
12 MMT (about 25 percent of expected 2013
global demand) is currently in storage.
Increases in inventory have also been
promoted by a strong contango situation in
the aluminum futures market on the London
Metal Exchange (LME) and by very low
interest rates, a combination that has made
aluminum financing deals attractive.1
Western companies’ most
important misstep was
underestimating the buildup
of Chinese capacity.
Why didn’t Western companies remove ex-
cess capacity when demand declined? Alumi-
num has high fixed costs, which make it diffi-
cult to shut down capacity. Smelters that lack
a captive energy supply usually enter into
long-term energy contracts that contain fixed
off-take agreements—that is, the operator
must continue to pay for energy even if it
shuts down production. Regional govern-
ments often prevent smelter closures and of-
fer subsidies in exchange for preserving jobs.
In addition, high costs for shutting down and
restarting operations often prevent compa-
nies from closing smelters temporarily. Final-
ly, shutting down capacity in a global com-
modity business can be like a game of
chicken. Because companies benefit if a com-
petitor cuts production, they are inclined to
wait for others to shut down capacity before
doing so themselves.
This analysis, however, doesn’t explain why
capacity outside China increased so drastical-
ly beyond demand. Although the global eco-
nomic crisis was not widely predicted, the
fallout from the crisis only partially explains
the overcapacity. Demand growth outside
China was slow even before the crisis—about
2 percent per year from 2000 through 2007.
Misjudging China’s Expansion
Plans
Western aluminum companies’ most impor-
tant misstep was significantly underestimat-
ing the buildup of Chinese capacity. Because
China lacked sufficient amounts of high-qual-
ity bauxite and inexpensive energy, the con-
ventional wisdom was that China would im-
port primary aluminum to fuel the demands
of its rapidly expanding downstream industry.
Importing primary aluminum from regions
that have a comparative advantage in smelt-
ing (such as the Middle East and Russia)
seemed like the logical choice for China’s
“make or buy” decision—especially because
China enjoys a comparative advantage in
semifinished aluminum products and down-
stream aluminum fabrication.
In 2000, China’s imports of primary alumi-
num accounted for more than 25 percent of
its consumption. In anticipation of rising Chi-
nese imports, large-scale capacity expansion
occurred in other parts of the world. Yet the
anticipated rise in Chinese imports did not
happen. Instead, China rapidly expanded its
smelting capacity. Since 2007, imports have
accounted for less than 2 percent of Chinese
primary-aluminum demand, except for a brief
period in 2009.
Why did China expand domestic smelting
capacity so rapidly, contrary to the
expectations of the international aluminum
industry? China’s decision to increase
capacity may be hard for observers outside
the country to understand, especially because
the traditionally steep costs for primary-
aluminum production push most Chinese
smelters to the high end of the global supply
curve. (See Exhibit 4.) Yet several motivating
factors helped build a strong case for the
decision to increase capacity:
Achieving the Goal of National Self-Sufficien-••
cy. Along with steel, copper, and oil,
aluminum has been a crucial ingredient in
China’s rapid economic development.
China’s ability to control the value chain
for some of these commodities has been
The Boston Consulting Group | 9
limited, and the government has stated
that taking greater control is a top nation-
al priority. The benefits of no longer being
at the mercy of a limited number of
large-scale foreign suppliers of aluminum
outweighed the higher costs of local
production.
	 Moreover, this cost-benefit tradeoff will
increasingly work in China’s favor. The
cost premium for local production will
shrink significantly during the next five
years as aluminum production shifts to
western Chinese provinces such as
Xinjiang, Qinghai, and Ningxia. China’s
west is rich in stranded coal resources and
has potential for further hydroelectric
power. This would allow for the establish-
ment of captive power stations to directly
supply the smelters with cheap electricity.
Whereas companies in central and eastern
China mainly depend on power from the
public electricity grid, smelters in western
regions will benefit from lower costs as
well as a secure and stable energy supply.
In the medium term, new smelters in
western China are expected to have lower
cash costs than the average smelter
outside of China. In the short term,
however, likely delays in the construction
of the captive power stations will mean
that smelters must use expensive power
from the grid. Chinese companies will also
need to overcome challenges such as a
limited infrastructure for transporting raw
materials and finished products, as well as
a shortage of skilled labor.
Fulfilling Regional Economic Development••
Agendas. For regional governments, the
startup of an aluminum smelter can
enable rapid economic growth, create
jobs, and generate tax revenues. A smelter
can also be a catalyst for the development
of a more diverse downstream industry in
the region. The planned expansion of
smelting capacity in China’s western
regions will not only lower the average
cost of aluminum but also contribute to
the economic development of remote
regions, such as Xinjiang.
Generating Returns from Lower Capex.••
Capex requirements for aluminum
production in China can be much lower
(by up to 60 percent) than in other
Cash costs per metric ton,
second quarter 2011 ($)
4,000
3,000
2,000
1,000
Capacity (million
metric tons per year)
50403020100
World
average:
2,167
China
average:
2,578
Oceania
North America
Other AsiaMiddle East
India
Europe
Commonwealth of Independant States
China
Africa
South America
2011 demand:
42.3
Sources: Harbor Intelligence; BCG analysis.
Exhibit 4 | China Has Expanded Capacity at the High End of the Cost Curve
10 | The Aluminum Industry CEO Agenda, 2013–2015
countries, primarily because of lower-cost
technology and construction. (See Exhibit
5.) Lower capex is an important advan-
tage for Chinese producers, because it
allows them to generate returns similar to
those in other countries but from smaller
margins. The situation will improve
further as lower-cost capacity becomes
available in western regions.
China’s capex advantage will
improve further as lower-cost
capacity becomes available
in western regions.
China’s unique pricing dynamics also help to
explain its low import levels. Whereas the
aluminum market outside of China uses the
LME price, China uses its own domestic price
determined at the Shanghai Futures Ex-
change (SHFE). Imports are discouraged
through an import tax of 5 percent, and ex-
ports are discouraged by an even higher tax
of 15 percent. Within a band around the LME
price (set by a value-added tax, or VAT, and
import and export taxes), the SHFE price fol-
lows its own supply-demand dynamic. (See
Exhibit 6.) If the SHFE price leaves this band,
arbitrage opportunities through imports or
exports arise. This occurred in 2009, when
Chinese demand remained strong while de-
mand in the rest of the world collapsed, re-
sulting in imports of primary aluminum by
Chinese companies. But more recently, pric-
ing dynamics have discouraged imports.
Outside of China, capacity could increase
significantly if currently planned projects go
forward. While some projects will be post-
poned or canceled if the aluminum price re-
mains low, others will go ahead regardless.
Smelter construction often enables countries,
especially those in the Middle East, to attract
the downstream industry and utilize domes-
tic low-cost gas. This allows smelters to be
cash-positive even when many of them are
losing money in other parts of the world.
And because the extraction of shale gas
outside of the Middle East has decreased ex-
port prices, the use of natural gas in local
aluminum smelters has become even more
attractive.
By 2017, up to 6 to 7 MMT of smelting capac-
ity is expected to be added outside of China.
This includes newly constructed capacity plus
“capacity creep” (productivity improvements
relating to existing capacity, estimated to be
Alumina refining Aluminum smelting
1,400
0
2,000
4,000
6,000
Average capex for new projects
per metric ton of alumina ($)
–36% to –50%
China
700–900
Rest of the world
4,800
0
2,000
4,000
6,000
Average capex for new projects
per metric ton of aluminum ($)
–50% to –60%
China
1,800–2,400
Rest of the world
Source: BCG analysis.
Exhibit 5 | Chinese Players Benefit from Lower Capex
The Boston Consulting Group | 11
0.5 percent per year). Without the large-scale
closure of existing capacity—and assuming
China remains largely self-sufficient—the to-
tal smelting capacity of 36 to 37 MMT will re-
sult in overcapacity even beyond the levels
seen in the 2009 crisis.
In this scenario, the price of aluminum will
remain at low levels. Any price increase from
the small-scale closure of smelting capacity
will be limited by high warehouse stocks,
which will remain above precrisis levels
for years unless China increases imports sig-
nificantly.
Whether China will remain self-sufficient is
thus of crucial importance to the aluminum
industry in the rest of the world. It seems un-
likely that the enormous warehouse stocks
and excess production from outside China
will find their way to China’s downstream in-
dustry. Current capacity-expansion plans put
China on a course for sustained self-sufficien-
cy and increased cost competitiveness as
western China adds new capacity to the left
side of the global supply curve. An additional
14 to 15 MMT of capacity (new capacity plus
capacity creep) could be operational within
China in 2017. Taking into account the clo-
sure of about 1 MMT of existing high-cost ca-
pacity, and assuming that primary-aluminum
demand grows at 8 to 9 percent annually
through 2017, China’s industry would be self-
sufficient without significant overcapacity. In
contrast, overcapacity in the rest of the world
will likely worsen. (See Exhibit 7.)
There is, however, one fundamental challenge
that could cause China to abandon its current
path of self-sufficiency: an inability to secure
enough bauxite and alumina to feed Chinese
aluminum smelters, forcing downstream
producers to import primary aluminum.
Sufficient Alumina and Bauxite
Despite Resource Nationalism
Historically, the price of alumina has been
contractually linked to the price of aluminum.
It is thus often assumed that the low price of
aluminum is the main cause of the low price
of alumina, but China’s near self-sufficiency
in alumina is the more fundamental reason
underlying the low prices. For other raw mate-
rials, such as copper concentrate or iron ore,
China is dependent on imports from a limited
number of multinational mining companies,
which have been able to raise prices and reap
extremely high profits. This has not been the
case for alumina, China’s net imports of
4,000
3,500
3,000
2,500
2,000
1,500
0
January 1,
2013
July 1,
2012
July 1,
2009
4,500
July 1,
2008
January 1,
2008
January 1,
2009
January 1,
2012
July 1,
2011
January 1,
2011
July 1,
2010
January 1,
2010
Aluminum price per metric ton ($)
Lower band limit
(LME – 15%
export tax)
Upper band limit3
(LME + 5% import
tax + 17% VAT)
SHFE price2
High physical premiums of
more than $200 per metric ton in
the rest of the world discourage
strong Chinese imports1A low physical premium of
$50 to $100 per metric ton in the
rest of the world encouraged
Chinese imports1
Sources: London Metal Exchange; Shanghai Futures Exchange; broker reports; BCG research and analysis.
Note: LME=London Metal Exchange; SHFE=Shanghai Futures Exchange; VAT=valued-added tax.
1
Northwestern Europe delivered duty paid; U.S. Midwest Ingot price; Japan cost, insurance, and freight.
2
SHFE price one month forward.
3
Physical premiums, which would further increase the upper limit, are not included owing to regional differences.
Exhibit 6 | The SHFE Price Is Set Within a Narrow Arbitrage Band Around the LME Price
12 | The Aluminum Industry CEO Agenda, 2013–2015
which have declined sharply. (See Exhibit 8.)
In addition to building sufficient smelting ca-
pacity to meet domestic aluminum demand,
China has had enough alumina refining ca-
pacity to lower alumina imports from levels
that represented 43 percent of demand in
2001 to only 3 percent in 2011.
But China has not managed to secure self-
sufficiency one step further up the value
chain; the increase in domestic bauxite min-
ing from 9 MMT in 2001 to 36 MMT in 2011
was not nearly enough to feed China’s alumi-
na refineries, which produced more than 34
MMT of alumina in 2011. At the same time
that China has had to rely increasingly on
bauxite imports, Indonesia has become a ma-
jor exporter of low-cost bauxite. Indonesian
bauxite production increased from just 1
MMT in 2005 to 36 MMT in 2011, nearly all of
which was exported to China.
Some industry observers believe that China
will not be able to meet its bauxite demand
because of restrictions recently announced by
Indonesia. That country significantly altered
the upstream market in May 2012 by intro-
ducing a 20 percent tax on bauxite exports,
revoking a large number of export licenses,
and threatening to ban all bauxite exports be-
ginning in 2014. If this happens, bauxite and
alumina prices will increase, raising costs for
Chinese aluminum producers (but not neces-
sarily for the major Western producers, which
are largely self-sufficient in bauxite) and po-
tentially resulting in a significant increase in
Chinese imports of primary aluminum. A
surge in Chinese imports would lower ware-
house stocks, which would, in turn, support
the LME price and rescue the aluminum in-
dustry outside of China.
This scenario is unlikely, however. What is
more probable is that Indonesia will impose
only a moderate version of its proposed ex-
port ban. This would allow China to gradually
shift its feedstock from imported bauxite to
alumina, while, in the medium to long term,
it could increase imports of bauxite and alu-
mina from owned sources in Vietnam, Laos,
and other countries. China would thereby re-
main largely self-sufficient in primary alumi-
China Rest of the world
17.8
15.0
11.2
16.7
13.4
10.5
0
10
20
30
40
50
Aluminum (million
metric tons)
2017E
28–30
31–32
201120092007
Consumption (averaged with previous year until 2011)
Capacity (second quarter)
94 89 94
Consumption as a percentage of capacity
30.5
29.0
26.7
24.5
22.4
25.2
0
10
20
30
40
50
Aluminum (million
metric tons)
2017E
~27
36–37
201120092007
94 77 8090–94 73–75
Sources: Harbor Intelligence; World Bureau of Metal Statistics; BCG analysis.
Note: 2017 capacity assigns probability between 0 percent and 80 percent for “present, upcoming, and potential projects” listed by Harbor
Intelligence; we also assume capacity creep of 0.5 percent per year.
Exhibit 7 | By 2017, Oversupply Outside of China Will Likely Worsen If No Action Is Taken
The Boston Consulting Group | 13
num and maintain control of the upstream
value chain, causing alumina prices to in-
crease only moderately. But even if this were
the case, significant uncertainty would re-
main with regard to projects and expansion
plans in the short to medium term.
How China Got into the
Downstream Game
Since 2000, Chinese imports of semifabricat-
ed and selected fabricated aluminum prod-
ucts have remained constant in absolute
terms, but they have decreased significantly
relative to Chinese aluminum demand (from
14 percent in 2000 to 3 percent in 2011). This
reflects the country’s ability to produce an
ever-​increasing range of products at low cost.
For example, as recently as 2009, China had
to import almost all the aluminum sheet used
for beverage cans, because no Chinese com-
pany was able to produce the sheet specifica-
tions required by beverage companies. By
2011, however, 40 percent of the aluminum
sheet used for beverage cans in China was
produced domestically.
China’s exports of downstream products have
increased even faster than domestic con-
sumption. Exports of semifabricated and se-
lected fabricated aluminum products have in-
creased from 0.3 MMT in 2000 (equivalent to
10 percent of Chinese primary-aluminum de-
mand) to 4.4 MMT in 2011 (more than 25 per-
cent of primary-aluminum demand). This has
resulted in an extraordinary 28 percent annu-
al growth over 11 years. (See Exhibit 9.) Some
downstream products of which exports have
likewise increased significantly (such as auto-
motive wheels) are not even included in
these numbers because of the unavailability
of sufficiently detailed data.
In fact, Chinese exports of semifabricated
and fabricated products are a critical reason
for the slow growth in demand for primary
aluminum outside of China. If not for Chi-
nese exports of semifabricated and fabricat-
ed products, demand for primary aluminum
in the rest of the world would have been at
least 4.4 MMT higher in 2011, and the
compound annual growth rate of primary-
aluminum demand from 2000 to 2011 would
Alumina:
imports decline strongly
Copper concentrate:
imports grow with demand
Iron ore: imports
grow faster than demand
%Million metric tons
Net imports
Imports as a percentage of demand
%
80
60
40
20
0
Million metric tons
8
6
4
2
0
20092007200520032001
%
80
60
40
20
0
Million metric tons
800
600
400
200
0
20092007200520032001
120 721
Percentage change in price from January 2000 to September 2012
2011 2011
80
60
40
20
0
2,000
1,500
1,000
500
0
20092007200520032001
448
Sources: UN Commodity Trade Statistics Database; International Copper Study Group; World Bureau of Metal Statistics; BCG analysis.
Note: For copper concentrate, no reliable 2011 data were yet available.
Exhibit 8 | China’s Net Imports of Alumina Have Declined, While Net Imports of Other Raw
Materials Have Increased
14 | The Aluminum Industry CEO Agenda, 2013–2015
have been 2.5 percent or more instead of
1.1 percent.
Four circumstances have promoted the
significant increase in Chinese downstream
exports:
Chinese companies have managed to••
maintain their low cost base. They still
enjoy significant labor-cost advantages
over downstream producers and fabrica-
tors in mature markets. Although labor
costs represent a small share of costs in
the production of primary aluminum,
their share increases for semifabricated
products and can be very high for many
finished products. In addition to the labor
cost advantage, Chinese producers often
enjoy substantially lower sourcing costs
for nonaluminum components and
services, as well as efficient, low-cost
logistics chains for exports.
Chinese companies benefit from a huge••
domestic market, allowing them to
generate structural advantages from
economies of scale throughout their
sourcing, production, and distribution
ecosystem.
While exports of primary aluminum are••
discouraged by export taxes, the Chinese
tax system favors the export of semi-fabri-
cated and fabricated aluminum products
through a VAT rebate.
Chinese downstream companies can••
enjoy significant advantages in capital
expenditures and capital costs, just as
upstream companies do. This allows
them to sell at very competitive prices,
because lower margins are required to
generate equal levels of returns. Conse-
quently, Chinese companies can often
offset the energy-driven cost disadvan-
tage in the production of primary alumi-
num through significant downstream cost
advantages. These advantages are
evident in a comparison of the costs of
U.S. imports of Chinese semifabricated
and fabricated products with those of
products manufactured in the U.S. (See
Exhibit 10.)
Chinese downstream exports are expected to
grow, albeit at a slower rate of 4 to 9 percent
per year through 2017. By 2017, the export
volume will reach 6 to 8 MMT (excluding sev-
eral finished-aluminum products). This vol-
Chinese imports Chinese exports
10
5
4
3
2
1
0 0
30
20
Million metric tons %
0.6
2010
0.60.6
2008
0.60.6
2006
0.60.6
2004
0.60.5
2002
0.50.4
2000
0.5
Rest of the world’s primary-aluminum demand (%)
Chinese primary-aluminum demand (%)
Semifabricated and fabricated products1
4
3
2
1
0
5
20
30
0
10
4.4
2010
3.4
2.4
2008
3.2
3.0
2006
1.9
1.3
2004
0.8
0.6
2002
0.40.3
2000
0.3
Million metric tons %
2%
28%
Sources: UN Commodity Trade Statistics Database; International Aluminum Institute; BCG analysis.
Note: Some significant finished-aluminum-product categories, such as aluminum wheels, are not included in this analysis.
1
Based on UN Comtrade codes 7603 through 7616.
Exhibit 9 | Chinese Downstream Exports Have Grown by 28 Percent Annually Since 2000
The Boston Consulting Group | 15
ume is equivalent to 22 to 30 percent of the
primary-aluminum demand outside of China.
As this trend continues, China is becoming an
aluminum products powerhouse in areas such
as aluminum-based building and construction
products, infrastructure systems, transporta-
tion equipment, and consumer products. Its
rise as a downstream producer could also
change the competitive dynamics of many
product subcategories.
China’s downstream moves will increasingly
affect the world’s downstream producers. Dur-
ing the past few years, Chinese companies
have come to dominate the global market in
many categories of products that contain alu-
minum. For example, in equipment for wind
power, an application with significant alumi-
num content, the top three Chinese companies
control a combined 26 percent of the global
market, compared with only 3 percent in 2006.
The country’s massive and increasingly cost-
competitive supply base for primary alumi-
num will further drive growth of Chinese ex-
ports—especially of finished aluminum-
based products. This growth will have a
significant impact on global aluminum trade
in semifinished and finished products and
will cause aluminum converters and fabrica-
tors in developed markets to rethink their
production and market strategies.
Note
1. Contango is the condition in which futures prices are
trading higher than expected settlement prices at
contract maturity.
Primary aluminum Semifabricated (extrusion)
Fabricated
(extrusion-based end product)
2,578
2,080
362
314
517
2,400
(average
LME price
excluding
physical
premium)
2,475
(average
SHFE price1
)
U.S. local
production
2,394
U.S. imports
from China
3,601
144
658
1,124
210
436
144
164
U.S. local
production
1,560
U.S. imports
from China
1,176
2,028
4,100
957
1,441
U.S. local
production
5,541
U.S. imports
from China
3,368
144
239
Total costs above LME
per metric ton ($)
Total costs above LME
per metric ton ($)
Total costs above LME
per metric ton ($)
Transport Conversion costsProfit/interest/depreciation/SG&ADuties
–34% 33% 65%
Sources: Harbor Intelligence; BCG analysis.
Note: LME=London Metal Exchange; SHFE=Shanghai Futures Exchange; SG&A=selling, general, and administrative expenses.
1
Average price for second half of 2010 and first half of 2011.
Exhibit 10 | China’s Cost Competitiveness Increases Further Downstream
16 | The Aluminum Industry CEO Agenda, 2013–2015
TAKING ACTION AT THE
INDUSTRY AND COMPANY
LEVELS
The conditions underlying the
aluminum industry’s challenges are
unlikely to abate in the years ahead. Despite
strong demand from specific countries and
sectors, aluminum consumption will probably
remain sluggish in developed markets. At the
same time, significant capacity from new
primary-aluminum smelters will become
operational outside of China. In the Middle
East, in particular, competitive cost levels and
national economic agendas that create
industry clusters and zones will promote
development along the entire aluminum
value chain. And China is expected to be very
well-supplied with domestically produced
primary material, much of it coming from
smelters with cost positions that are signifi-
cantly better than historical averages. Low
interest rates will ease the burdens of carry-
ing large inventories and financing the
construction of new capacity.
The answer is for industry
players to align capacity rap-
idly and on a sufficient scale.
In this environment, the aluminum industry
must adopt a more aggressive approach to
confronting its challenges so that companies
can become profitable and generate attrac-
tive returns for their shareholders. This more-
aggressive approach must be implemented
on the industry level as well as the company
level:
On an industry level, the structural issue••
of overcapacity must be addressed by
taking concerted actions outside and
within China. The scale of the problem is
too daunting to be resolved by individual
companies acting independently and in
their own self-interest. It requires the
collective action of the key industry
players (including governments in critical
markets) to align capacity rapidly and on
a sufficient scale.
On the level of individual aluminum••
companies, the CEO agenda should
include initiatives that range from more
systematically capturing new opportuni-
ties upstream and downstream along the
value chain to achieving new levels of
excellence in multiple aspects of perfor-
mance. The appropriate actions will vary
significantly depending on a company’s
regional footprint, relative cost position,
and role in the value chain.
To help the overall industry and individual
companies address the current challenges,
BCG has developed a comprehensive
aluminum-industry CEO agenda comprising
ten actions items. (See Exhibit 11.) This
The Boston Consulting Group | 17
agenda provides a comprehensive and
practical starting point for setting the
priorities of industry executives as well as
government policymakers whose national or
regional economies are influenced by the
industry’s performance.
Taking Concerted Action Globally
and in China
Industry-level actions involve concerted inter-
ventions to manage primary smelting capac-
ity outside and inside China. To make the
necessary changes happen, new forms of co-
ordination will be required among primary
producers outside of China, as well as among
Chinese stakeholders and their counterparts
in the rest of the world.
Creating Viable Industry Structures Outside
of China. The aluminum industry outside of
China faces challenges that primarily stem
from significant structural issues that can
only be addressed through a wide range of
industry-level actions. In recent years, some
companies have added capacity while not
removing unprofitable and only marginally
profitable smelters from the market. In the
aggregate, strategies that seek to optimize
individual businesses can weaken the overall
industry if they create overcapacity that
promotes price erosion. Indeed, optimization
efforts aimed solely at the company level
pose a major threat to the industry.
Understandably, no company wants to be the
first to significantly reduce capacity, because
it cannot predict how its competitors will re-
spond. A first mover’s actions (whether to re-
duce capacity or slow the pace at which it
adds capacity) could ultimately be advanta-
geous to the competition, which will reap the
benefits without sharing the costs. In the alu-
minum industry, there is neither a high level
of trust in companies’ collective ability to re-
solve the structural issues nor a strong sense
of shared responsibility for dealing with the
issues head-on.
In addition to taking an aggressive approach
to shutting down capacity, the industry must
take a more proactive approach to managing
the addition of new capacity. The sluggish
economy in many regions will no doubt re-
Aluminum
CEO
agenda
Address supply-side
issues in China
Create viable industry
structures outside of China
Capture opportunities
in the value chain
Industry-level
agenda
Enterprise-level
agenda
Achieve enterprise
excellence
Obtain regulatory support
for industry actions
Create a new company for
marginal assets
Create an industry leader through M&A
Systematically internationalize Chinese
primary-aluminum production
Accelerate removal of highest-cost
Chinese capacity
Explore upstream opportunities in
bauxite and alumina
Focus on high-value or lowest-cost
downstream businesses
Raise cost excellence
to a fundamentally new level
Radically improve management of
large-capex projects
Achieve commercial excellence
Source: BCG analysis.
Exhibit 11 | Ten Action Items for the Aluminum Industry CEO Agenda
18 | The Aluminum Industry CEO Agenda, 2013–2015
sult in the delay or even cancellation of some
projects. Even accounting for the probability
of delays and cancellations, however, up to 6
to 7 MMT of additional smelting capacity
could be added outside of China by 2017, as
noted above. Much of this capacity will have
a competitive cost position; some of it is in-
tended to serve purposes beyond smelting,
such as attracting the downstream industry
or promoting economic diversification and
job creation. As a result, we expect that any
efforts to significantly reduce planned capac-
ity buildup will be difficult to undertake.
Nonetheless, companies should make con-
certed efforts to best align future additions to
capacity with the realities of the market.
Governments and regulatory
bodies should help the indus-
try in its restructuring efforts.
Leaders will have to adopt innovative ap-
proaches in order to implement a significant
restructuring of capacity throughout the in-
dustry. Three action items on our CEO agen-
da address this imperative:
Create an industry leader through M&A.•• In
times of reduced demand, an industry is
better off if a clear market leader removes
excess capacity instead of participating in
a ruinous price war with other companies.
The world’s largest steelmaker, for
example, has successfully assumed a
stewardship role in its industry. During the
recent economic crisis in Europe, this
industry leader removed much more
capacity than its competitors, thereby
helping to prevent an even greater
decrease in steel prices. In contrast, the
aluminum industry lacks a clear market
leader—each of the top three primary-
aluminum companies has roughly a 15
percent market share. Consolidation
through M&A—whether through one
transaction or a series of deals—could cre-
ate a company with the market leadership
required to undertake capacity rational-
ization efforts autonomously. As with any
M&A deal, the consolidation must make
economic sense for the entities involved
and must create value. The cost savings
through synergies and the revenue uplift
through improved pricing will need to
exceed the costs of completing the M&A
transaction and shutting down capacity.
Create a new company for marginal assets.••
The financial services industry has
addressed its significant issues related to
nonperforming assets by creating so-
called bad banks, which acquire these
assets at market price. By transferring its
nonperforming assets to a bad bank, a
financial institution removes the assets
from its balance sheet and takes a write-
down. Companies in the aluminum
industry could apply a similar strategy by
creating a new business in order to
acquire marginal assets. Before using this
approach, organizations would have to
address several issues, including the
ownership structure of the new company,
the means of transferring and valuing the
assets, and the exit strategy for the new
company.
Obtain regulatory support for industry••
actions. Governments and regulatory
bodies should help the industry in its
restructuring efforts by creating legal
constructs that allow the burden of
capacity reduction to be spread among
different companies. An example of such a
construct on a national level is Germany’s
“structural crisis cartel,” which succeeded
in removing structural overcapacity from
the country’s steel and shipbuilding
industries. The aluminum industry must
also convince national and local govern-
ments that capacity cuts are unavoidable
and that previous approaches—such as
providing additional energy subsidies to
keep inefficient, high-cost plants margin-
ally profitable—aggravate capacity
problems rather than solve them. To make
the required measures politically accept-
able, stakeholders must develop approach-
es to address the needs of workers who
will lose their jobs.
Addressing Supply-Side Issues in China. To
address challenges arising from China’s
abundance of smelting capacity, the global
The Boston Consulting Group | 19
industry should seek to hasten the removal of
the country’s high-cost capacity while also
encouraging Chinese companies to relocate
their capacity to other countries.
China has been modernizing its aluminum
industry in recent years by taking out of ser-
vice many of the small, subscale smelters op-
erating with outdated technologies. It is re-
placing these with large-scale smelting
operations run by professional enterprises in
accordance with world-class standards. Even
so, there remains a substantial opportunity to
shut down more of the old, inefficient smelt-
ers still operating throughout China. These
smelters could be replaced, in part, with sub-
stantially lower-cost capacity within China or
elsewhere.
Accelerating the removal of high-cost capac-
ity will require significant concerted action by
the Chinese central government in close co-
operation with regional and local govern-
ments. For example, these governments
would need to work together to enforce high-
er operating standards for aluminum smelt-
ers. This could be accomplished through addi-
tional tax levies on smelters that operate
above specified levels of cost or carbon diox-
ide emissions. (High-cost smelters typically
have the highest emission levels.) Govern-
ments could also withdraw incentives provid-
ed to keep marginal capacity in business,
thereby raising these smelters’ costs even fur-
ther so that their operations were no longer
financially viable. The central government
must be prepared to address strong opposi-
tion to plant closures from local government
officials under pressure to preserve and pro-
mote employment and economic growth. Pre-
vious smelter closures in China, as well as in
mature economies such as Germany, present
lessons for mitigating negative regional im-
pacts, such as through workforce redeploy-
ment initiatives.
While overcapacity is a more significant issue
outside of China than within, China could be
an important part of the solution. China is ex-
pected to remain self-sufficient in primary
aluminum and to control as much of the val-
ue chain as possible. However, a clear distinc-
tion with regard to self-sufficiency should be
made between operations within China’s na-
tional boundaries and the operations of Chi-
nese companies globally. China’s alumina-
sourcing and production strategy is a good
example of this distinction. China will likely
become more dependent on imports, but
these imports will be provided mainly by
companies that are owned and controlled, at
least in part, by Chinese companies.
The same scenario could be applied to prima-
ry aluminum. Although some projects in
western China will have very competitive
cash costs, other planned smelters will still
have far higher costs than the global average
outside of China. Instead of building these
high-cost smelters, Chinese companies could
redirect part of their primary-aluminum in-
vestments to lower-cost regions outside of
China, where local aluminum companies may
welcome international coinvestors. If Chinese
companies invested in smelters abroad that
have already been planned, they could avoid
building additional capacity within China,
thereby reducing the amount of new capacity
globally.
China can be an important
part of the solution to the
issue of global overcapacity.
This scenario could promote a win-win situa-
tion for all stakeholders, since the industry as
a whole would benefit from less overcapacity.
New smelters outside of China would get im-
mediate access to the large Chinese market
and its highly diverse customer base. And, by
reducing their dependence on domestic capac-
ity, Chinese companies would diversify their
regional exposure and the related risks. Be-
cause they would still control the value chain,
Chinese companies could capture the full val-
ue created by a domestic industry that con-
verts and fabricates downstream aluminum.
To make this opportunity a reality, foreign
governments and the aluminum companies
operating within their countries will need to
involve their Chinese counterparts in multi-
lateral discussions to identify potential op-
portunities for Chinese companies to invest
20 | The Aluminum Industry CEO Agenda, 2013–2015
in smelters abroad. International stakehold-
ers must be prepared to demonstrate to Chi-
nese officials that China will benefit from di-
versifying its ownership and control of
aluminum capacity internationally. To be per-
suasive, international players must present a
compelling long-term value proposition. A
useful model could be Japan’s success in in-
vesting internationally while it was reducing
domestic smelting capacity. These stakehold-
ers must also develop a master list of projects
in which China could participate, including
both ongoing and future projects. In addition,
the parties will need to clearly define China’s
role and that of the other partners in interna-
tional projects.
Capturing Opportunities and
Achieving New Levels of
Business Excellence
Individual aluminum companies will need to
take radical steps to improve their own per-
formance while alleviating the industry’s cri-
sis. Companies should regard bauxite and
alumina as offering very attractive growth
opportunities, while the downstream market
could provide attractive opportunities for
emphasizing high value and superior capabil-
ities or low costs and superior service. All
companies, irrespective of their position
along the value chain, will be forced to take a
fundamentally new look at opportunities for
quantum-leap improvements in cost reduc-
tion, capex management, and commercial ex-
cellence.
New Opportunities Upstream and Down-
stream. Until the global overcapacity of
smelting is reduced, companies will struggle
to earn high returns in this part of the value
chain. The upstream and downstream mar-
kets could offer particularly fertile ground for
value creation. What actions should industry
executives consider in order to capture these
opportunities?
In the near term, the upstream segments of
the value chain will be more attractive than
smelting. The supply of bauxite and alumina
will continue to be more constrained than
the supply of primary aluminum. Because
bauxite mining and alumina refining are also
relatively concentrated industries, they are
more likely to have better industry discipline
with respect to capacity and pricing. More-
over, the price of alumina is becoming in-
creasingly decoupled from the price of pri-
mary aluminum. Until recently, pricing in
most alumina contracts was based on a for-
mula that applied a percentage of the LME
price of aluminum, but pricing is now in-
creasingly based on alumina spot indices
that are not tied to aluminum’s LME price.
As a result, pricing dynamics of alumina will
develop on the basis of the material’s own
strong market fundamentals, not those of the
oversupplied aluminum market.
Because current supplies will not be suffi-
cient to satisfy China’s increasing demand for
bauxite and alumina, large investments in
new capacity will be required worldwide.
While Chinese primary-aluminum companies
are expected to continue to pursue backward
integration in the value chain, Western com-
panies should seek new opportunities to sup-
ply Chinese smelters with alumina or to en-
gage in joint mining and alumina projects
with Chinese partners.
The upstream and down-
stream markets offer fertile
ground for value creation.
Large traditional aluminum players have par-
ticularly strong expertise in bauxite mining
and alumina refining, including experience
in exploration, mine operations, and logis-
tics—as well as in working effectively with
the host governments of rapidly developing
economies (RDEs). Their expertise will
make it possible for large companies to over-
come the following upstream-market chal-
lenges that create entry barriers to other
players:
More stringent licensing procedures in••
many countries have made it harder to
obtain access to bauxite deposits.
Higher licensing fees, among other factors,••
have increased the cost of operating
bauxite mines.
The Boston Consulting Group | 21
Capex required to develop new mines and••
refining capacity have increased.
Governments of bauxite-rich nations••
require mine operators to participate in
national programs for infrastructure
investment and economic development in
return for obtaining access to their
national resources.
Smelter operators as well as mining and re-
fining companies can pursue initiatives to
capture upstream opportunities.
Smelter operators should conduct a thorough
review of their alumina-supply strategy with
an eye toward pursuing backward integration.
By increasing their ownership of mines and re-
fineries, smelters can better manage their ex-
posure to supply risks and reduce their need
to negotiate contracts with powerful suppliers
in the concentrated upstream market. They
can also capture value from the more attrac-
tive market conditions that favor upstream
businesses. The objective is to create a supply
portfolio with the optimal mix of owned and
contracted sources and exposure to country-
specific risks. The strategic review should con-
sider both existing contracts with suppliers
and current supply streams from owned mines
and refineries. Smelter operators should com-
pare the prices they will pay for alumina given
their current portfolio of owned and contract-
ed sources with a forecast of those prices un-
der different scenarios. The output of the re-
view should guide future contract negotiations
and investment decisions.
Owners of mines and refineries should devel-
op a supply-and-demand model for the alumi-
na market over the next ten years. This should
include determining an updated forecast of
alumina demand for both China and the rest
of the world, identifying alumina consumers
globally, and assessing the extent to which
these consumers will own or buy alumina sup-
plies. Executives should also identify the loca-
tions of potential new mining operations.
Companies can use this market model as the
starting point for defining their strategy. The
strategic agenda should include planning for
expansion, determining a competitive cost
base, and identifying opportunities for joint
ventures with customers (such as Chinese
companies). Companies should also use the
market model to determine the investment
model and ownership structure of future
mining and refining assets.
Additionally, upstream operators should ad-
dress their cost base more aggressively and
systematically. As noted above, mining has
become increasingly expensive. This creates
the need to manage costs more aggressively
in order to ensure the competitiveness of
products. Players in the upstream part of the
value chain can capture the greatest potential
from cost management because they have
typically been the least forceful in this area.
Upstream operators need to
manage costs aggressivly to
ensure competitiveness.
Finally, mining and refining companies
should accelerate their efforts to decouple the
prices of alumina and aluminum by enforcing
an independent alumina-pricing mechanism.
This will allow them to capture the full up-
side from the favorable market conditions
discussed above. They should use this inde-
pendent price in transfers among mines, re-
fineries, and smelters.
Opportunities in the value chain’s down-
stream segments also warrant close attention.
In recent years, operations in low-cost coun-
tries have redefined the global production-
and-supply landscape of many downstream
products. Multinational companies active in
flat-rolled products, extrusions, and castings
have diversified their production networks to
include an increasing number of manufactur-
ing sites in cost-advantaged regions such as
China, Eastern Europe, and Latin America.
These facilities were established to enable
sales in fast-growing domestic economies, as
well as to provide lower-cost supply hubs for
global export markets.
At the same time, domestic producers in
RDEs are increasingly exporting their prod-
ucts in order to compete head to head with
22 | The Aluminum Industry CEO Agenda, 2013–2015
incumbent suppliers around the world. These
challengers are constantly improving their
technical and commercial capabilities to
serve markets globally, while buyers are in-
creasingly willing to source from them.
As we have discussed, China has established
itself as a major force in the global supply of
downstream products—not only semi-finished
products but also end products. Examples of
China’s reach into the global market include
aluminum extrusions for architectural proj-
ects; aluminum foil for household, commercial,
and industrial applications; and finished prod-
ucts such as garden furniture, picture frames,
and automotive wheels.
The globalization of down-
stream products creates chal-
lenges and opportunities.
Some countries have restricted low-cost im-
ports; for example, the U.S. has limited im-
ports of aluminum extrusions from China.
However, these trade-related interventions
are not likely to stop the globalization of
downstream supply, especially as multina-
tionals from mature economies increasingly
set up production in RDEs. For many alumi-
num-product segments, downstream busi-
nesses will no longer be operated on a local
or regional basis.
The globalization of downstream aluminum
products creates substantial challenges and
opportunities for incumbent players. To suc-
ceed, these companies must either develop
the most competitive offering for commod-
itized products that do not benefit from hav-
ing production located close to customers or
maximize the differentiation of their prod-
ucts, services, and brands. Companies based
in RDEs must substantially strengthen their
capabilities in order to mature from interna-
tional challengers to global leaders.
Both incumbents and challengers should ​
assess their strategies for capturing opportu-
nities in the changing downstream land-
scape.
Incumbents should conduct a thorough review
of their current and future competitive land-
scape, assessing the international threat and
potential opportunity for each line of business,
product family, region, and customer relation-
ship. This should include the extent to which
sales and profits are or will be challenged by
companies from RDEs, as well as the nature of
the threat in terms of superior cost, differenti-
ated products, and differentiated sales and
marketing. Companies should also identify
lines of business that appear to be safe from
competitive threats and determine how these
lines can position themselves as the best sup-
pliers to meet customers’ needs.
These established companies should fine-tune
their strategies on the basis of this assessment
and define the appropriate implementation
initiatives. The assessment could confirm that
the current business model is competitive and
suggest ways to improve it for long-term sus-
tainability and resilience. Alternatively, it
could trigger a radical overhaul of the strategy
so that the company can significantly improve
cost competitiveness (including international
low-cost options) or focus on a substantially
different product mix that better enables com-
petitive differentiation.
Challengers from RDEs will need to substan-
tially upgrade their business models to fully
capture international growth opportunities.
Although many of these companies already
sell products abroad, few are properly set up
for aggressive global expansion. To position
themselves, they must develop and systemati-
cally deploy a well-defined international
growth strategy and design a product portfo-
lio fine-tuned for the international market.
They must also define a robust supply-chain
model that meets the service requirements of
the international customer base, as well as a
go-to-market approach that will reach the
right buyers. Often, the biggest challenge is
creating an organization truly equipped for
international business development, includ-
ing senior managers with significant interna-
tional business experience and a culture that
will ensure global success.
Achieving Enterprise Excellence in Three
Dimensions. To achieve and sustain a com-
petitive advantage, companies must substan-
The Boston Consulting Group | 23
tially raise their game in three critical dimen-
sions of business performance: operating and
overhead costs, capex management, and
commercial activities.
Aluminum companies must
deploy truly rigorous and
holistic lean programs.
The objectives of continuously reducing oper-
ating and overhead costs, improving energy
efficiency, and increasing the productivity of
capacity are central to the performance cul-
ture of every operator throughout the alumi-
num value chain. Companies that make their
operations leaner can also achieve the flex-
ibility required to align production with mar-
ket needs and are often able to provide supe-
rior service and quality levels.
However, most aluminum companies have al-
ready captured the opportunities available
through the traditional means of achieving
operational excellence. Only a few companies
have been able to create sustainable world-
class operations. Some companies attain only
limited benefits from lean operations be-
cause their programs are overly broad and
lack the required depth. In many cases, the
necessary capital, manpower, and analytical
tools to apply lean operations effectively are
not available. Even when companies achieve
dramatic improvements initially, they may
struggle to sustain momentum. To raise oper-
ational excellence to a new level, aluminum
companies must deploy truly rigorous and
holistic lean programs—from the production
floor to the head office and from short-term
campaigns to initiatives designed to achieve
significant and lasting change. This should
entail taking a close look at other industries
to ensure that the company is adopting the
leading practices for operational excellence.
In BCG’s experience, companies can reach an
advanced level of lean operating perfor-
mance by refocusing on fundamentals and
pursuing smaller and faster initiatives. Given
the severe financial pressures that aluminum
companies currently experience, it is vital to
rapidly achieve visible impact. A quick lean
health check can identify a handful of fo-
cused changes that will significantly improve
costs and performance. Companies can see
major savings in specific areas within months.
Based on our experience along the aluminum
value chain, the best opportunities for im-
provements can typically be found in the fol-
lowing areas:
Procurement,•• by optimizing and renegotiat-
ing the contracts for major consumable
categories and service contracts
Repair and maintenance,•• by redefining the
related requirements and procedures, and
improving sourcing costs and process
productivity
Inventory management,•• by setting the right
levels of buffer stocks, streamlining
materials flows, and improving operations
planning and demand forecasts
Logistics,•• by boosting warehouse produc-
tivity and minimizing freight costs
Overhead costs,•• by eliminating, consolidat-
ing, or streamlining administrative
functions in plants and in regional,
business unit, and headquarters offices
The key is to pick the most effective improve-
ment levers by weighing the tradeoffs among
them and deciding which ones to tackle im-
mediately. Given the situation’s urgency, it is
important that aluminum companies focus
on a small number of areas that are easy to
analyze, that can typically be addressed with-
out major capital investments, and that al-
most always have room for improvement no
matter how much attention was paid to them
in the past. (See Lean in Industrial Goods: Driv-
ing to Breakthrough Performance, BCG report,
September 2011.)
In addition to managing operating costs, alu-
minum companies (especially those from ma-
ture markets) need to find ways to signifi-
cantly reduce their capex. Aluminum
operations are far more capital intensive
than copper or steel plants and are among
the most expensive to build—requiring capi-
24 | The Aluminum Industry CEO Agenda, 2013–2015
tal investments of $5 billion to $10 billion in
the case of new smelters. Western companies
suffer from a distinct disadvantage regarding
capex levels, as their Chinese counterparts
often only require half as much capital to
build plants with similar levels of capacity
and operating efficiency. What’s more, oper-
ating profits must be higher year after year
to offset unnecessarily high capex during a
project’s development phase. To ensure the
competitiveness of an asset base that will
last for decades, Western companies should
take all possible steps to close the gap be-
tween their capex levels and those of Chi-
nese companies.
To improve their execution of large-capex
projects, some companies have implemented
quality control programs, issued more fre-
quent project-status updates, and transferred
a larger component of the risk to outside con-
tractors. While such measures can help, they
often do not address the core need for a new
approach to project management.
Comprehensive risk manage-
ment for large-capex projects
is increasingly important.
BCG has identified eight levers that compa-
nies and contractors can apply to ensure that
their large projects are completed at competi-
tive capex levels, on time, on budget, and
within required quality parameters. (See Eight
Key Levers for Effective Large-Capex-Project
Management: Introducing the BCG LPM Octagon,
BCG report, October 2012.) For aluminum
companies, three of these levers are especial-
ly important for making fundamental im-
provements to large-capex-project manage-
ment: minimizing capex needs, rigorous risk
management, and securing scarce resources
and local content:
Minimizing Capex Needs.•• Companies
should make their value requirements
clear to contractors and equipment
providers to ensure that the technical
specifications and proposed solutions are
truly aligned with the project’s needs. This
includes the use of value engineering to
ensure that new facilities are not over­
designed and that the full range of
possible technology and equipment
options (including providers in low-cost
countries) are being considered.
Rigorous Risk Management.•• Comprehensive
risk management for large-capex projects
is increasingly important because many
new aluminum plants are built in remote
locations and global supply chains, and
vendor arrangements for engineering,
procurement, and construction have
become increasingly complex. Clear guide-
lines should be set to define acceptable
levels of risk exposure and ensure that
portfolio policies are aligned with the
strategic vision (such as the maximum size
of projects, capex per year, and other
metrics). A clear ranking according to risk
and value will help optimize investment
decisions. At the project level, the com-
pany should exercise ultimate control over
risks even when a contractor is in charge
of implementation. This entails under-
standing risks at each step of the project,
classifying them by severity and likeli-
hood, determining options to mitigate
each risk, and implementing a forward-
looking reporting system to allow proac-
tive intervention.
Securing Scarce Resources and Local Capa-••
bilities. Most industrial sectors expect
sustained growth over the next decade,
and companies are developing many large
projects, often located in the same regions
of Asia, Africa, the Middle East, and Latin
America. As a result, companies have to
compete for skilled human capital, natural
resources, infrastructure, and critical
equipment. Securing access to scarce
resources and local capabilities, especially
in areas with a high concentration of
projects, will be essential.
Traditionally, aluminum companies’
performance culture has centered on the
manufacturing function. Companies evaluate
their level of excellence based on
manufacturing KPIs, such as costs, tonnage
produced, productivity, and uptime. At the
same time, they have devoted scant attention
The Boston Consulting Group | 25
to understanding how to best serve their
customers’ needs.
To improve their overall performance in to-
day’s business environment, aluminum com-
panies must follow the lead of consumer
goods companies and transition to a culture
that emphasizes understanding customers’
evolving needs and quickly tailoring offerings
to meet these needs. Companies that success-
fully adopt a “customer back” approach can
use value-added offerings and premium ser-
vices to free themselves from the constraints
of selling a commodity. They will be able to
set price premiums to reflect the value of tai-
lored offerings and increase market share by
achieving higher levels of customer satisfac-
tion and loyalty. The objective is to develop a
premium brand that is recognized for provid-
ing a better solution and more value, not just
a quantity of aluminum.
Commercial excellence requires creating a
customer-focused mindset and a professional
marketing and sales function with capabilities
in researching customer insight. To inform de-
cision making, marketing and sales must un-
derstand what customers consider important,
the problems they need to solve, the sources
of their satisfaction or dissatisfaction with cur-
rent offerings, and what makes them loyal.
These insights can then be fed back into the
product design and manufacturing process to
create customized offerings that capture the
value of improved service. Companies should
also gather competitive intelligence to under-
stand how well competitors are meeting cus-
tomers’ needs, as well as the opportunities for
better meeting these needs.
Companies must design KPIs and incentives
relating to areas that promote customer satis-
faction, such as delivery speed, reliability, and
flexible service. They also need to create fo-
rums and processes for cross-functional col-
laboration that enable the manufacturing
and marketing and sales functions to inte-
grate their activities. And the marketing and
sales team must build stronger external ties
with customers’ procurement teams to devel-
op long-term strategic relationships as a sup-
ply chain partner.
Leading aluminum companies have already
begun to transition to a customer-centered
culture. They have created customer insight
teams similar to those used by consumer
goods companies, and they have developed
sophisticated pricing schemes that reflect the
higher value of specific service offerings. In
addition, they have created market sector
teams to consider the specific needs of, for
example, automotive, industrial, or packaging
customers, so that they can tailor offerings to
these customers’ different needs.
26 | The Aluminum Industry CEO Agenda, 2013–2015
SETTING THE AGENDA
ALONG THE VALUE CHAIN
Companies throughout the ­value
chain must set a new strategic agenda
in response to the fundamental changes in
the aluminum industry landscape. This
does not mean that they should assume
an exclusively defensive posture. All
companies have an opportunity to play
offense by identifying and capturing
opportunities that arise from the industry’s
crisis.
Upstream: Pursue High-Value
Opportunities in Bauxite and
Alumina
To benefit from the attractive opportunities
in the upstream segment, executives should
identify ways to capture value in bauxite
mining and alumina refining and design ini-
tiatives for putting the strategies into prac-
tice. As a first step in setting the agenda, ex-
ecutives should consider the following
questions:
Do we clearly understand how China’s••
aluminum strategy will affect our access
to bauxite and alumina and the price of
these raw materials?
Do we have a strategy in place that••
enables us to capture the full upside of
the future opportunities in bauxite and
alumina while protecting us from possible
downsides?
For smelters: have we assessed whether it••
is beneficial to integrate backward by
acquiring mines and refineries or expand-
ing our existing upstream investments?
For mines and refineries: given the••
uncertainties about China’s upstream
strategy and the alumina needs of non-
Chinese smelters, what is the right
investment strategy? How much upstream
capacity should we invest in, at what cost,
where, and with whom?
Smelters: Take Bold Actions to
Ensure Long-Term Viability
To ensure the long-term viability of their part
of the value chain, smelter operators must
make radical moves to achieve a significant
industrywide turnaround and substantial im-
provements in company performance. The
following questions can guide the agenda-
setting process:
Do we have an actionable strategy for our••
smelter portfolio as a whole and for each
location, enabling us to address the
challenges and capture the opportunities
at hand?
Do we clearly understand the implications••
of China’s aluminum-industry strategy for
our business over the next five to ten
years?
The Boston Consulting Group | 27
What is the shape of the future cost curve••
and where are our assets positioned on
this curve? How competitive are we
under different supply-and-demand
scenarios?
Which costs have the most potential for••
substantial short-term reduction? How can
we capture the full cost-reduction poten-
tial quickly?
What improvements can we make beyond••
operating costs? How can we effectively
manage our capex? What are the opportu-
nities to optimize the top line by focusing
on what customers are willing to pay for?
How can we contribute to implementing••
meaningful concerted industry actions?
How can we become active in M&A,
international partnerships, and govern-
ment lobbying?
Downstream: Capture New
Upside Opportunities While
Safeguarding the Baseline
The downstream market faces a crossroads,
as incumbent companies in developed mar-
kets and challengers from RDEs compete for
dominance. Incumbent companies must as-
sess threats and take action to capture new
opportunities while protecting their current
lines of business. Challengers must elevate
their international growth strategies and ca-
pabilities organizationwide to grow their
businesses internationally.
Executives of incumbent players should con-
sider these questions:
Which lines of business, sales, and profits••
are or will be threatened by challengers
from RDEs?
Does the threat from these challengers••
relate to superior cost, innovative prod-
ucts, distinctive sales and marketing, or
other issues?
Which lines of business appear to be••
protected from these threats and why?
Which products or services do customers••
consider to be truly important in our
more secure lines of business? How can
our company best position itself as their
supplier?
Executives of challengers from RDEs should
consider the following:
How long will our current competitive••
advantage over incumbent players last
before it erodes because of labor cost
increases, for example?
How can we gradually move from our••
current product portfolio to higher
value-added products? Which products are
the most promising?
Beyond our home market and current••
regional reach, which locations are the
most promising for expansion given our
current competitive advantages?
What are the specific customer needs in••
these potential new markets and how can
we develop the capabilities required to
serve them successfully?
For all companies along the value chain, the
answers to these questions will point to op-
portunities to make significant course correc-
tions in their strategic agenda. The resulting
performance improvements will provide a
critical source of competitive advantage for
individual companies and help to reorient the
aluminum industry’s outlook from crisis to
prosperity.
28 | The Aluminum Industry CEO Agenda, 2013–2015
for further reading
The Boston Consulting Group has
published other reports and articles
on the topics covered by this report
that may be of interest to senior ex-
ecutives. Examples are listed here.
Taking the Long-Term View in
Turbulent Times: Value Creation
in Mining 2012
A report by The Boston Consulting
Group, January 2013
Capital Procurement: The
Cornerstone of Successful
Projects
A Focus by The Boston Consulting
Group, October 2012
Eight Key Levers for Effective
Large-Capex-Project
Management: Introducing the
BCG LPM Octagon
A Focus by The Boston Consulting
Group, October 2012
Lean in Industrial Goods: Driving
to Breakthrough Performance
A Focus by The Boston Consulting
Group, September 2011
The Boston Consulting Group | 29
note to the reader
About the Authors
Thomas Bradtke is a partner and
managing director in the Dubai
office of The Boston Consulting
Group. Filiep Deforche is a senior
partner and managing director in
the firm’s Brussels office. Roman
Deniskin is a partner and
managing director in BCG’s
Moscow office. Marc Gilbert is a
senior partner and managing
director in the firm’s Toronto office.
Ketil Gjerstad is a partner and
managing director in BCG’s Oslo
office. Kai Gruner is a senior
partner and managing director in
the firm’s Stockholm office. Dirk
Harlacher is a project leader in
BCG’s Cologne office. Alexander
Koch is a partner and managing
director in the firm’s Perth office.
Knut Olav Rød is a partner and
managing director in BCG’s Oslo
office.
Acknowledgments
The authors would like to thank
Stephen Amery, Eric Boudier, Victor
Du, Mark Freedman, Knut Haanæs,
Dirk Harlacher, Roland Haslehner,
Andreas Jebsen, Øystein Kvaale,
Alona Nemyrovska, Felix Schuler,
Philip Ernst Schulze-Smidt, Felix
Stellmaszek, and Gustav Terland for
their contributions to the research
included in this report. The authors
are also grateful to David Klein for
his writing assistance and to
Katherine Andrews, Gary Callahan,
Sarah Davis, Kim Friedman, Abigail
Garland, and Sara Strassenreiter for
their contributions to editing,
design, and production.
For Further Contact
For further information about the
report, or to learn more about
BCG’s capabilities with regard to
the aluminum industry, please
contact one of the authors:
Thomas Bradtke
Partner and Managing Director
BCG Dubai
+971 4 4480 409
bradtke.thomas@bcg.com
Filiep Deforche
Senior Partner and Managing Director
BCG Brussels
+32 2 289 02 18
deforche.filiep@bcg.com
Roman Deniskin
Partner and Managing Director
BCG Moscow
+7 499 7553 286
deniskin.roman@bcg.com
Marc Gilbert
Senior Partner and Managing Director
BCG Toronto
+1 514 448 7464
gilbert.marc@bcg.com
Ketil Gjerstad
Partner and Managing Director
BCG Oslo
+47 21 04 6766
gjerstad.ketil@bcg.com
Dirk Harlacher
Project Leader
BCG Cologne
+49 221 55 00 50
harlacher.dirk@bcg.com
Kai Gruner
Senior Partner and Managing Director
BCG Stockholm
+46 8 402 4403
gruner.kai@bcg.com
Alexander Koch
Partner and Managing Director
BCG Perth
+61 8 6364 4312
koch.alexander@bcg.com
Knut Olav Rød
Partner and Managing Director
BCG Oslo
+47 21 04 6766
rod.knutolav@bcg.com
© The Boston Consulting Group, Inc. 2013. All rights reserved.
For information or permission to reprint, please contact BCG at:
E-mail: 	 bcg-info@bcg.com
Fax: 	 +1 617 850 3901, attention BCG/Permissions
Mail: 	 BCG/Permissions
	 The Boston Consulting Group, Inc.
	 One Beacon Street
	 Boston, MA 02108
	USA
To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcgperspectives.com.
Follow bcg.perspectives on Facebook and Twitter.
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The aluminum industry ceo agenda 2013 - by BCG

  • 1. The Aluminum Industry CEO Agenda, 2013–2015 Understanding the Challenges and Taking Action
  • 2. The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for- profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep in­sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet­itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 78 offices in 43 countries. For more information, please visit bcg.com.
  • 3. The Aluminum Industry CEO Agenda, 2013–2015 Understanding the Challenges and Taking Action June 2013 | The Boston Consulting Group Thomas Bradtke Filiep Deforche Roman Deniskin Marc Gilbert Ketil Gjerstad Kai Gruner dirk harlacher Alexander Koch Knut Olav Rød
  • 4. 2 | The Aluminum Industry CEO Agenda, 2013–2015 Contents 3 INTRODUCTION 5 WHAT CAUSED THE INDUSTRY’S CRISIS? A Two-Speed World for Demand The Rapid Growth of China’s Capacity Misjudging China’s Expansion Plans Sufficient Alumina and Bauxite Despite Resource Nationalism How China Got into the Downstream Game 16 TAKING ACTION AT THE INDUSTRY AND COMPANY LEVELS Taking Concerted Action Globally and in China Capturing Opportunities and Achieving New Levels of Business Excellence 26 SETTING THE AGENDA ALONG THE VALUE CHAIN Upstream: Pursue High-Value Opportunities in Bauxite and Alumina Smelters: Take Bold Actions to Ensure Long-Term Viability Downstream: Capture New Upside Opportunities While Safeguarding the Baseline 28 FOR FURTHER READING 29 NOTE TO THE READER
  • 5. The Boston Consulting Group | 3 Aluminum is a metal characterized by abundance because of its availability as a naturally occurring element and its use in every- thing from sophisticated aerospace components to commonplace con- sumer products. This characteristic extends to the industry that pro- duces aluminum. While industry executives enjoy an abundance of market opportunities for their product, they have also experienced an abundance of severe challenges in recent years. Analyses of the aluminum industry’s performance reveal the emer- gence of significant issues that are likely keeping many aluminum- industry executives awake at night. Chief among their concerns are the sharp decline in company valuations and profits and the de- pressed price of aluminum. The market capitalization of the top international aluminum compa- nies has dropped by about 65 percent over the past five years. Earn- ings before interest and taxes margins have decreased by about 5 per- centage points, a disturbing trend for an industry that’s among the world’s most capital intensive. The copper industry needs to invest, on average, $14,000 per ton of primary output from mine to metal, compared with $8,000 per ton of aluminum for capital related to mines, refineries, and smelters. However, if the value of the produced metal is included in the calculation, aluminum is twice as capital in- tensive as copper (as well as steel). As margins dwindle, the alumi- num industry sits on a very expensive asset base that needs higher profits to generate sufficient returns. The decline in company valuations and profits was driven by a severe- ly depressed price for primary aluminum. Compared with other met- als, aluminum entirely missed the “commodity super cycle.” Since Jan- uary 2000, the price of primary aluminum has increased by just 20 percent, compared with more than 100 percent for steel and almost 350 percent for copper. When adjusted for inflation, aluminum is ac- tually valued below its 2000 price, which is especially striking because prices for other raw materials have enjoyed a substantial premium in recent years. The gap is even more dramatic for the feedstock for pri- mary aluminum: prices for both bauxite and alumina have increased by less than 20 percent since January 2000. In contrast, the price of iron ore is more than 600 percent higher today (it was more than 900 percent higher at the postcrisis peak in late 2011), and the price of metallurgical coal is about 250 percent higher. To reignite the value creation engine and restore investor confidence, aluminum industry CEOs and their management teams must develop INTRODUCTION
  • 6. 4 | The Aluminum Industry CEO Agenda, 2013–2015 and implement compelling action plans that will turn around the in- dustry. Executives need a deep understanding of what caused the alu- minum industry’s crisis in order to develop a meaningful and deploy- able CEO agenda that addresses current challenges and captures new opportunities. These are the key questions: Why did aluminum miss the commodity super cycle?•• Is the industry’s crisis temporary, or does it reflect a long-term•• structural change? To guide future actions, what could aluminum companies have•• done differently in recent years to avoid or mitigate the industry’s performance issues? What strategies will be most effective to get the aluminum indus-•• try back on track? What specific actions should aluminum executives push forward in•• their companies? Below we answer these questions and propose specific actions that aluminum executives can take—providing an aluminum industry CEO agenda for 2013 to 2015. By understanding the root causes of the crisis and taking the right actions to respond, aluminum industry executives have an opportunity to change their luck with element number 13.
  • 7. The Boston Consulting Group | 5 To identify the underlying causes of the current crisis, we examined the challenges and outlook for the demand and supply of primary aluminum and the up- stream and downstream segments of the value chain. (See Exhibit 1.) Our analyses show that the industry’s crisis cannot be traced back to an unexpected drop in demand caused by the global economic downturn or to sudden, surprising changes in the upstream or downstream segments of the value chain. Instead, the crisis arose from the supply side, driven by China’s strategy to in- crease its capacity for producing primary alu- minum. Producers in the rest of the world did not predict China’s moves and did not respond with sufficiently rapid strategic adjustments. WHAT CAUSED THE INDUSTRY’S CRISIS? • Chinese demand has grown at a rate of almost 16% per year since 2000 (now 45% of global demand), while growth in the rest of the world has been only slightly above 1% per year • Outlook: China will continue to drive strong growth; demand is expected to expand by 8% to 9% per year, versus 1% for the rest of the world • Oversupply led to huge physical inventories aer the economic crisis (more than 10 million metric tons in 2012) • Despite higher costs, China remained self-sufficient—while the rest of the world expected it to increase imports • Outlook: China will remain self-sufficient, overcapacity will increase in the rest of the world,and the LME price will remain low because of supply-demand imbalance and high warehouse stocks • China has been self-sufficient in alumina, and bauxite is plentiful—thus, Chinese demand has not driven prices higher • Outlook: China controls the value chain, imports will partially shi from bauxite to alumina, and prices will rise moderately as new supply regions—such as Vietnam and Laos—are developed • Chinese exports have increased by approximately 28% per year since 2000, reducing primary- aluminum demand in the rest of the world • Lower processing costs have offset China’s disadvantage in primary aluminum • Outlook: Chinese exports will continue to rise but likely at a slower rate of 4% to 9% per year Demand Supply Upstream Downstream Source: BCG analysis. Note: LME=London Metal Exchange. Exhibit 1 | Challenges and Outlook for the Global Aluminum Industry
  • 8. 6 | The Aluminum Industry CEO Agenda, 2013–2015 A Two-Speed World for Demand Since 2000, primary aluminum has experi- enced particularly strong global growth in demand—nearly 5 percent per year. This is a significantly higher rate than that of global GDP during the same period and twice as strong as the metal’s average de- mand growth rate of 2.4 percent during the preceding 30 years. Aluminum’s annual de- mand growth since the turn of the millenni- um has outpaced that of copper (2.6 per- cent) and is similar to that of finished steel (5.3 percent). But a purely global perspective does not re- veal the most critical fact about demand: global consumption has been driven almost entirely by China, resulting in a “two-speed world” of aluminum consumption. Primary- aluminum consumption in China has grown at a rate of almost 16 percent per year since 2000, while growth in the rest of the world has been only slightly above 1 percent per year. (See Exhibit 2.) The differential was es- pecially apparent during the global financial crisis. In 2009, consumption outside China dropped by 17 percent, whereas Chinese con- sumption increased by 15 percent. This growth was driven by China’s massive invest- ments in real estate and infrastructure, as well as by private consumption and exports of manufactured goods containing alumi- num. As a consequence, China’s share of global aluminum demand increased from 14 percent in 2000 to 42 percent in 2011. Its share is expected to have reached approxi- mately 45 percent in 2012. The two-speed pattern for demand in China versus the rest of the world also holds true for copper and steel. The industry has failed to translate a demand surge into higher prices or profits. As is the case for other basic-materials in- dustries, the aluminum industry has enjoyed a super cycle on the demand side. But in contrast to most of its peer industries, it has largely failed to translate that demand surge into higher prices or increased profit- ability. Aluminum demand compared with other metals Metal demand by region 0 190 170 150 130 110 90 2012E Finished steel 185% (5.3% per year) Primary aluminum 177% (4.9% per year) Primary copper 136% (2.6% per year) 2010 2008 2006 2004 2002 2000 Demand (%, 2000 = 100) 600 500 400 300 200 100 0 Demand (%, 2000 = 100) 2012E Finished steel 515% (14.6% per year) Primary aluminum 116% (1.2% per year) Primary aluminum 562% (15.5% per year) Primary copper 89% (–1.0% per year) Primary copper 468% (13.7% per year) 2010 2008 2006 2004 2002 2000 China Rest of the world Finished steel 121% (1.6% per year) Sources: World Bureau of Metal Statistics; World Steel Association; BCG analysis. Note: 2012 values have been annualized based on the first eight months for aluminum and copper according to the October 2012 World Steel Association short-range outlook for steel. Exhibit 2 | Strong Demand Growth in Aluminum Is Driven by China
  • 9. The Boston Consulting Group | 7 Given the substantial benefits of aluminum and its use in key growth sectors such as transportation equipment, infrastructure, and consumer products, demand is expected to remain strong in the long term. Trends such as rising fuel prices and concerns about car- bon dioxide emissions, for example, are likely to accelerate the substitution of aluminum for steel in the automotive industry. And due to the strong price increase in copper, alumi- num has recently begun to be used as a sub- stitute in selected electrical applications. We expect global primary-aluminum demand to grow at an annual rate of 4 to 5 percent during the next five to ten years. This strong growth will continue to be driven by China, where demand is expected to expand by 8 to 9 percent per year. Demand growth in the rest of the world will likely be approximately 1 percent per year. In 2017, global demand for primary aluminum will reach 55 to 57 mil- lion metric tons (MMT) according to this fore- cast, with China consuming 28 to 30 MMT, or 51 to 53 percent, of global demand. China’s role as the growth engine of global aluminum demand does, in principle, present a great opportunity for the industry—but the country is also a major pain point. Its sub- stantial increase in demand triggered the de- velopment of massive Chinese production ca- pacity—a phenomenon that did not occur with other commodities in China. This ex- panding Chinese supply is at the root of the global aluminum crisis. The Rapid Growth of China’s Capacity In the second quarter of 2007, demand and supply for primary aluminum were still in balance. (See Exhibit 3.) The effective global smelting capacity was 37.9 MMT, and global consumption was 35.7 MMT, equal to 94 per- cent of capacity. At the height of the econom- ic crisis in the second quarter of 2009, con- sumption was largely unchanged, but global capacity had increased to 44 MMT, reducing the ratio of consumption to capacity to 81 percent. Although the ratio rose to 85 per- cent globally in 2011, there is a stark contrast between China and the rest of the world. The ratio fully recovered to 94 percent in China, but was only 80 percent in the rest of the world. … leading to oversupply, especially outside of China… …and resulting in high warehouse stocks in the rest of the world 2011 41.3 48.3 2009 35.8 44.0 2007 35.7 37.9 Consumption (averaged with previous year) Capacity (second quarter) Overcapacity occurred during the economic crisis… Consumption as a percentage of capacity 2011 16.7 17.8 2009 13.415.0 2007 10.511.2 2011 24.5 30.5 2009 22.4 29.0 2007 25.226.7 MMT 94 77 80 94 81 85 94 89 94 MMT MMT 0 2,000 4,000 LME price ($thousands) RoW warehouse stocks1 (MMT) 8.0 6.0 4.0 2.0 0.0 7.3 LME priceRoW warehouse stocks Rest of the world China 0 2,000 4,000 SHFE price ($thousands) SHFE warehouse stocks (MMT) 2.0 1.5 1.0 0.5 0.0 January 2014E January 2012 January 2010 January 2008 January 2006 0.4 SHFE priceSHFE warehouse stocks January 2014E January 2012 January 2008 January 2006 January 2010 Sources: Harbor Intelligence; World Bureau of Metal Statistics; London Metal Exchange; Bloomberg; BCG analysis. Note: All prices are based on month-end value. LME warehouse stocks are based on month-end value. SHFE warehouse stocks are based on month’s average. LME=London Metal Exchange; MMT=million metric tons; SHFE=Shanghai Futures Exchange. 1 Includes LME, Japan, and some producer inventories; not all third-party inventories are included. Exhibit 3 | Sustained Oversupply of Aluminum Has Led to High Inventories
  • 10. 8 | The Aluminum Industry CEO Agenda, 2013–2015 Whereas China’s smelting capacity has increased in tandem with its aluminum consumption, supply and demand in the rest of the world continue to be severely out of balance. Instead of shutting down capacity on a large scale (and thereby stabilizing prices), smelters around the world continued to produce. As a result, huge inventories of aluminum have piled up in warehouses; 10 to 12 MMT (about 25 percent of expected 2013 global demand) is currently in storage. Increases in inventory have also been promoted by a strong contango situation in the aluminum futures market on the London Metal Exchange (LME) and by very low interest rates, a combination that has made aluminum financing deals attractive.1 Western companies’ most important misstep was underestimating the buildup of Chinese capacity. Why didn’t Western companies remove ex- cess capacity when demand declined? Alumi- num has high fixed costs, which make it diffi- cult to shut down capacity. Smelters that lack a captive energy supply usually enter into long-term energy contracts that contain fixed off-take agreements—that is, the operator must continue to pay for energy even if it shuts down production. Regional govern- ments often prevent smelter closures and of- fer subsidies in exchange for preserving jobs. In addition, high costs for shutting down and restarting operations often prevent compa- nies from closing smelters temporarily. Final- ly, shutting down capacity in a global com- modity business can be like a game of chicken. Because companies benefit if a com- petitor cuts production, they are inclined to wait for others to shut down capacity before doing so themselves. This analysis, however, doesn’t explain why capacity outside China increased so drastical- ly beyond demand. Although the global eco- nomic crisis was not widely predicted, the fallout from the crisis only partially explains the overcapacity. Demand growth outside China was slow even before the crisis—about 2 percent per year from 2000 through 2007. Misjudging China’s Expansion Plans Western aluminum companies’ most impor- tant misstep was significantly underestimat- ing the buildup of Chinese capacity. Because China lacked sufficient amounts of high-qual- ity bauxite and inexpensive energy, the con- ventional wisdom was that China would im- port primary aluminum to fuel the demands of its rapidly expanding downstream industry. Importing primary aluminum from regions that have a comparative advantage in smelt- ing (such as the Middle East and Russia) seemed like the logical choice for China’s “make or buy” decision—especially because China enjoys a comparative advantage in semifinished aluminum products and down- stream aluminum fabrication. In 2000, China’s imports of primary alumi- num accounted for more than 25 percent of its consumption. In anticipation of rising Chi- nese imports, large-scale capacity expansion occurred in other parts of the world. Yet the anticipated rise in Chinese imports did not happen. Instead, China rapidly expanded its smelting capacity. Since 2007, imports have accounted for less than 2 percent of Chinese primary-aluminum demand, except for a brief period in 2009. Why did China expand domestic smelting capacity so rapidly, contrary to the expectations of the international aluminum industry? China’s decision to increase capacity may be hard for observers outside the country to understand, especially because the traditionally steep costs for primary- aluminum production push most Chinese smelters to the high end of the global supply curve. (See Exhibit 4.) Yet several motivating factors helped build a strong case for the decision to increase capacity: Achieving the Goal of National Self-Sufficien-•• cy. Along with steel, copper, and oil, aluminum has been a crucial ingredient in China’s rapid economic development. China’s ability to control the value chain for some of these commodities has been
  • 11. The Boston Consulting Group | 9 limited, and the government has stated that taking greater control is a top nation- al priority. The benefits of no longer being at the mercy of a limited number of large-scale foreign suppliers of aluminum outweighed the higher costs of local production. Moreover, this cost-benefit tradeoff will increasingly work in China’s favor. The cost premium for local production will shrink significantly during the next five years as aluminum production shifts to western Chinese provinces such as Xinjiang, Qinghai, and Ningxia. China’s west is rich in stranded coal resources and has potential for further hydroelectric power. This would allow for the establish- ment of captive power stations to directly supply the smelters with cheap electricity. Whereas companies in central and eastern China mainly depend on power from the public electricity grid, smelters in western regions will benefit from lower costs as well as a secure and stable energy supply. In the medium term, new smelters in western China are expected to have lower cash costs than the average smelter outside of China. In the short term, however, likely delays in the construction of the captive power stations will mean that smelters must use expensive power from the grid. Chinese companies will also need to overcome challenges such as a limited infrastructure for transporting raw materials and finished products, as well as a shortage of skilled labor. Fulfilling Regional Economic Development•• Agendas. For regional governments, the startup of an aluminum smelter can enable rapid economic growth, create jobs, and generate tax revenues. A smelter can also be a catalyst for the development of a more diverse downstream industry in the region. The planned expansion of smelting capacity in China’s western regions will not only lower the average cost of aluminum but also contribute to the economic development of remote regions, such as Xinjiang. Generating Returns from Lower Capex.•• Capex requirements for aluminum production in China can be much lower (by up to 60 percent) than in other Cash costs per metric ton, second quarter 2011 ($) 4,000 3,000 2,000 1,000 Capacity (million metric tons per year) 50403020100 World average: 2,167 China average: 2,578 Oceania North America Other AsiaMiddle East India Europe Commonwealth of Independant States China Africa South America 2011 demand: 42.3 Sources: Harbor Intelligence; BCG analysis. Exhibit 4 | China Has Expanded Capacity at the High End of the Cost Curve
  • 12. 10 | The Aluminum Industry CEO Agenda, 2013–2015 countries, primarily because of lower-cost technology and construction. (See Exhibit 5.) Lower capex is an important advan- tage for Chinese producers, because it allows them to generate returns similar to those in other countries but from smaller margins. The situation will improve further as lower-cost capacity becomes available in western regions. China’s capex advantage will improve further as lower-cost capacity becomes available in western regions. China’s unique pricing dynamics also help to explain its low import levels. Whereas the aluminum market outside of China uses the LME price, China uses its own domestic price determined at the Shanghai Futures Ex- change (SHFE). Imports are discouraged through an import tax of 5 percent, and ex- ports are discouraged by an even higher tax of 15 percent. Within a band around the LME price (set by a value-added tax, or VAT, and import and export taxes), the SHFE price fol- lows its own supply-demand dynamic. (See Exhibit 6.) If the SHFE price leaves this band, arbitrage opportunities through imports or exports arise. This occurred in 2009, when Chinese demand remained strong while de- mand in the rest of the world collapsed, re- sulting in imports of primary aluminum by Chinese companies. But more recently, pric- ing dynamics have discouraged imports. Outside of China, capacity could increase significantly if currently planned projects go forward. While some projects will be post- poned or canceled if the aluminum price re- mains low, others will go ahead regardless. Smelter construction often enables countries, especially those in the Middle East, to attract the downstream industry and utilize domes- tic low-cost gas. This allows smelters to be cash-positive even when many of them are losing money in other parts of the world. And because the extraction of shale gas outside of the Middle East has decreased ex- port prices, the use of natural gas in local aluminum smelters has become even more attractive. By 2017, up to 6 to 7 MMT of smelting capac- ity is expected to be added outside of China. This includes newly constructed capacity plus “capacity creep” (productivity improvements relating to existing capacity, estimated to be Alumina refining Aluminum smelting 1,400 0 2,000 4,000 6,000 Average capex for new projects per metric ton of alumina ($) –36% to –50% China 700–900 Rest of the world 4,800 0 2,000 4,000 6,000 Average capex for new projects per metric ton of aluminum ($) –50% to –60% China 1,800–2,400 Rest of the world Source: BCG analysis. Exhibit 5 | Chinese Players Benefit from Lower Capex
  • 13. The Boston Consulting Group | 11 0.5 percent per year). Without the large-scale closure of existing capacity—and assuming China remains largely self-sufficient—the to- tal smelting capacity of 36 to 37 MMT will re- sult in overcapacity even beyond the levels seen in the 2009 crisis. In this scenario, the price of aluminum will remain at low levels. Any price increase from the small-scale closure of smelting capacity will be limited by high warehouse stocks, which will remain above precrisis levels for years unless China increases imports sig- nificantly. Whether China will remain self-sufficient is thus of crucial importance to the aluminum industry in the rest of the world. It seems un- likely that the enormous warehouse stocks and excess production from outside China will find their way to China’s downstream in- dustry. Current capacity-expansion plans put China on a course for sustained self-sufficien- cy and increased cost competitiveness as western China adds new capacity to the left side of the global supply curve. An additional 14 to 15 MMT of capacity (new capacity plus capacity creep) could be operational within China in 2017. Taking into account the clo- sure of about 1 MMT of existing high-cost ca- pacity, and assuming that primary-aluminum demand grows at 8 to 9 percent annually through 2017, China’s industry would be self- sufficient without significant overcapacity. In contrast, overcapacity in the rest of the world will likely worsen. (See Exhibit 7.) There is, however, one fundamental challenge that could cause China to abandon its current path of self-sufficiency: an inability to secure enough bauxite and alumina to feed Chinese aluminum smelters, forcing downstream producers to import primary aluminum. Sufficient Alumina and Bauxite Despite Resource Nationalism Historically, the price of alumina has been contractually linked to the price of aluminum. It is thus often assumed that the low price of aluminum is the main cause of the low price of alumina, but China’s near self-sufficiency in alumina is the more fundamental reason underlying the low prices. For other raw mate- rials, such as copper concentrate or iron ore, China is dependent on imports from a limited number of multinational mining companies, which have been able to raise prices and reap extremely high profits. This has not been the case for alumina, China’s net imports of 4,000 3,500 3,000 2,500 2,000 1,500 0 January 1, 2013 July 1, 2012 July 1, 2009 4,500 July 1, 2008 January 1, 2008 January 1, 2009 January 1, 2012 July 1, 2011 January 1, 2011 July 1, 2010 January 1, 2010 Aluminum price per metric ton ($) Lower band limit (LME – 15% export tax) Upper band limit3 (LME + 5% import tax + 17% VAT) SHFE price2 High physical premiums of more than $200 per metric ton in the rest of the world discourage strong Chinese imports1A low physical premium of $50 to $100 per metric ton in the rest of the world encouraged Chinese imports1 Sources: London Metal Exchange; Shanghai Futures Exchange; broker reports; BCG research and analysis. Note: LME=London Metal Exchange; SHFE=Shanghai Futures Exchange; VAT=valued-added tax. 1 Northwestern Europe delivered duty paid; U.S. Midwest Ingot price; Japan cost, insurance, and freight. 2 SHFE price one month forward. 3 Physical premiums, which would further increase the upper limit, are not included owing to regional differences. Exhibit 6 | The SHFE Price Is Set Within a Narrow Arbitrage Band Around the LME Price
  • 14. 12 | The Aluminum Industry CEO Agenda, 2013–2015 which have declined sharply. (See Exhibit 8.) In addition to building sufficient smelting ca- pacity to meet domestic aluminum demand, China has had enough alumina refining ca- pacity to lower alumina imports from levels that represented 43 percent of demand in 2001 to only 3 percent in 2011. But China has not managed to secure self- sufficiency one step further up the value chain; the increase in domestic bauxite min- ing from 9 MMT in 2001 to 36 MMT in 2011 was not nearly enough to feed China’s alumi- na refineries, which produced more than 34 MMT of alumina in 2011. At the same time that China has had to rely increasingly on bauxite imports, Indonesia has become a ma- jor exporter of low-cost bauxite. Indonesian bauxite production increased from just 1 MMT in 2005 to 36 MMT in 2011, nearly all of which was exported to China. Some industry observers believe that China will not be able to meet its bauxite demand because of restrictions recently announced by Indonesia. That country significantly altered the upstream market in May 2012 by intro- ducing a 20 percent tax on bauxite exports, revoking a large number of export licenses, and threatening to ban all bauxite exports be- ginning in 2014. If this happens, bauxite and alumina prices will increase, raising costs for Chinese aluminum producers (but not neces- sarily for the major Western producers, which are largely self-sufficient in bauxite) and po- tentially resulting in a significant increase in Chinese imports of primary aluminum. A surge in Chinese imports would lower ware- house stocks, which would, in turn, support the LME price and rescue the aluminum in- dustry outside of China. This scenario is unlikely, however. What is more probable is that Indonesia will impose only a moderate version of its proposed ex- port ban. This would allow China to gradually shift its feedstock from imported bauxite to alumina, while, in the medium to long term, it could increase imports of bauxite and alu- mina from owned sources in Vietnam, Laos, and other countries. China would thereby re- main largely self-sufficient in primary alumi- China Rest of the world 17.8 15.0 11.2 16.7 13.4 10.5 0 10 20 30 40 50 Aluminum (million metric tons) 2017E 28–30 31–32 201120092007 Consumption (averaged with previous year until 2011) Capacity (second quarter) 94 89 94 Consumption as a percentage of capacity 30.5 29.0 26.7 24.5 22.4 25.2 0 10 20 30 40 50 Aluminum (million metric tons) 2017E ~27 36–37 201120092007 94 77 8090–94 73–75 Sources: Harbor Intelligence; World Bureau of Metal Statistics; BCG analysis. Note: 2017 capacity assigns probability between 0 percent and 80 percent for “present, upcoming, and potential projects” listed by Harbor Intelligence; we also assume capacity creep of 0.5 percent per year. Exhibit 7 | By 2017, Oversupply Outside of China Will Likely Worsen If No Action Is Taken
  • 15. The Boston Consulting Group | 13 num and maintain control of the upstream value chain, causing alumina prices to in- crease only moderately. But even if this were the case, significant uncertainty would re- main with regard to projects and expansion plans in the short to medium term. How China Got into the Downstream Game Since 2000, Chinese imports of semifabricat- ed and selected fabricated aluminum prod- ucts have remained constant in absolute terms, but they have decreased significantly relative to Chinese aluminum demand (from 14 percent in 2000 to 3 percent in 2011). This reflects the country’s ability to produce an ever-​increasing range of products at low cost. For example, as recently as 2009, China had to import almost all the aluminum sheet used for beverage cans, because no Chinese com- pany was able to produce the sheet specifica- tions required by beverage companies. By 2011, however, 40 percent of the aluminum sheet used for beverage cans in China was produced domestically. China’s exports of downstream products have increased even faster than domestic con- sumption. Exports of semifabricated and se- lected fabricated aluminum products have in- creased from 0.3 MMT in 2000 (equivalent to 10 percent of Chinese primary-aluminum de- mand) to 4.4 MMT in 2011 (more than 25 per- cent of primary-aluminum demand). This has resulted in an extraordinary 28 percent annu- al growth over 11 years. (See Exhibit 9.) Some downstream products of which exports have likewise increased significantly (such as auto- motive wheels) are not even included in these numbers because of the unavailability of sufficiently detailed data. In fact, Chinese exports of semifabricated and fabricated products are a critical reason for the slow growth in demand for primary aluminum outside of China. If not for Chi- nese exports of semifabricated and fabricat- ed products, demand for primary aluminum in the rest of the world would have been at least 4.4 MMT higher in 2011, and the compound annual growth rate of primary- aluminum demand from 2000 to 2011 would Alumina: imports decline strongly Copper concentrate: imports grow with demand Iron ore: imports grow faster than demand %Million metric tons Net imports Imports as a percentage of demand % 80 60 40 20 0 Million metric tons 8 6 4 2 0 20092007200520032001 % 80 60 40 20 0 Million metric tons 800 600 400 200 0 20092007200520032001 120 721 Percentage change in price from January 2000 to September 2012 2011 2011 80 60 40 20 0 2,000 1,500 1,000 500 0 20092007200520032001 448 Sources: UN Commodity Trade Statistics Database; International Copper Study Group; World Bureau of Metal Statistics; BCG analysis. Note: For copper concentrate, no reliable 2011 data were yet available. Exhibit 8 | China’s Net Imports of Alumina Have Declined, While Net Imports of Other Raw Materials Have Increased
  • 16. 14 | The Aluminum Industry CEO Agenda, 2013–2015 have been 2.5 percent or more instead of 1.1 percent. Four circumstances have promoted the significant increase in Chinese downstream exports: Chinese companies have managed to•• maintain their low cost base. They still enjoy significant labor-cost advantages over downstream producers and fabrica- tors in mature markets. Although labor costs represent a small share of costs in the production of primary aluminum, their share increases for semifabricated products and can be very high for many finished products. In addition to the labor cost advantage, Chinese producers often enjoy substantially lower sourcing costs for nonaluminum components and services, as well as efficient, low-cost logistics chains for exports. Chinese companies benefit from a huge•• domestic market, allowing them to generate structural advantages from economies of scale throughout their sourcing, production, and distribution ecosystem. While exports of primary aluminum are•• discouraged by export taxes, the Chinese tax system favors the export of semi-fabri- cated and fabricated aluminum products through a VAT rebate. Chinese downstream companies can•• enjoy significant advantages in capital expenditures and capital costs, just as upstream companies do. This allows them to sell at very competitive prices, because lower margins are required to generate equal levels of returns. Conse- quently, Chinese companies can often offset the energy-driven cost disadvan- tage in the production of primary alumi- num through significant downstream cost advantages. These advantages are evident in a comparison of the costs of U.S. imports of Chinese semifabricated and fabricated products with those of products manufactured in the U.S. (See Exhibit 10.) Chinese downstream exports are expected to grow, albeit at a slower rate of 4 to 9 percent per year through 2017. By 2017, the export volume will reach 6 to 8 MMT (excluding sev- eral finished-aluminum products). This vol- Chinese imports Chinese exports 10 5 4 3 2 1 0 0 30 20 Million metric tons % 0.6 2010 0.60.6 2008 0.60.6 2006 0.60.6 2004 0.60.5 2002 0.50.4 2000 0.5 Rest of the world’s primary-aluminum demand (%) Chinese primary-aluminum demand (%) Semifabricated and fabricated products1 4 3 2 1 0 5 20 30 0 10 4.4 2010 3.4 2.4 2008 3.2 3.0 2006 1.9 1.3 2004 0.8 0.6 2002 0.40.3 2000 0.3 Million metric tons % 2% 28% Sources: UN Commodity Trade Statistics Database; International Aluminum Institute; BCG analysis. Note: Some significant finished-aluminum-product categories, such as aluminum wheels, are not included in this analysis. 1 Based on UN Comtrade codes 7603 through 7616. Exhibit 9 | Chinese Downstream Exports Have Grown by 28 Percent Annually Since 2000
  • 17. The Boston Consulting Group | 15 ume is equivalent to 22 to 30 percent of the primary-aluminum demand outside of China. As this trend continues, China is becoming an aluminum products powerhouse in areas such as aluminum-based building and construction products, infrastructure systems, transporta- tion equipment, and consumer products. Its rise as a downstream producer could also change the competitive dynamics of many product subcategories. China’s downstream moves will increasingly affect the world’s downstream producers. Dur- ing the past few years, Chinese companies have come to dominate the global market in many categories of products that contain alu- minum. For example, in equipment for wind power, an application with significant alumi- num content, the top three Chinese companies control a combined 26 percent of the global market, compared with only 3 percent in 2006. The country’s massive and increasingly cost- competitive supply base for primary alumi- num will further drive growth of Chinese ex- ports—especially of finished aluminum- based products. This growth will have a significant impact on global aluminum trade in semifinished and finished products and will cause aluminum converters and fabrica- tors in developed markets to rethink their production and market strategies. Note 1. Contango is the condition in which futures prices are trading higher than expected settlement prices at contract maturity. Primary aluminum Semifabricated (extrusion) Fabricated (extrusion-based end product) 2,578 2,080 362 314 517 2,400 (average LME price excluding physical premium) 2,475 (average SHFE price1 ) U.S. local production 2,394 U.S. imports from China 3,601 144 658 1,124 210 436 144 164 U.S. local production 1,560 U.S. imports from China 1,176 2,028 4,100 957 1,441 U.S. local production 5,541 U.S. imports from China 3,368 144 239 Total costs above LME per metric ton ($) Total costs above LME per metric ton ($) Total costs above LME per metric ton ($) Transport Conversion costsProfit/interest/depreciation/SG&ADuties –34% 33% 65% Sources: Harbor Intelligence; BCG analysis. Note: LME=London Metal Exchange; SHFE=Shanghai Futures Exchange; SG&A=selling, general, and administrative expenses. 1 Average price for second half of 2010 and first half of 2011. Exhibit 10 | China’s Cost Competitiveness Increases Further Downstream
  • 18. 16 | The Aluminum Industry CEO Agenda, 2013–2015 TAKING ACTION AT THE INDUSTRY AND COMPANY LEVELS The conditions underlying the aluminum industry’s challenges are unlikely to abate in the years ahead. Despite strong demand from specific countries and sectors, aluminum consumption will probably remain sluggish in developed markets. At the same time, significant capacity from new primary-aluminum smelters will become operational outside of China. In the Middle East, in particular, competitive cost levels and national economic agendas that create industry clusters and zones will promote development along the entire aluminum value chain. And China is expected to be very well-supplied with domestically produced primary material, much of it coming from smelters with cost positions that are signifi- cantly better than historical averages. Low interest rates will ease the burdens of carry- ing large inventories and financing the construction of new capacity. The answer is for industry players to align capacity rap- idly and on a sufficient scale. In this environment, the aluminum industry must adopt a more aggressive approach to confronting its challenges so that companies can become profitable and generate attrac- tive returns for their shareholders. This more- aggressive approach must be implemented on the industry level as well as the company level: On an industry level, the structural issue•• of overcapacity must be addressed by taking concerted actions outside and within China. The scale of the problem is too daunting to be resolved by individual companies acting independently and in their own self-interest. It requires the collective action of the key industry players (including governments in critical markets) to align capacity rapidly and on a sufficient scale. On the level of individual aluminum•• companies, the CEO agenda should include initiatives that range from more systematically capturing new opportuni- ties upstream and downstream along the value chain to achieving new levels of excellence in multiple aspects of perfor- mance. The appropriate actions will vary significantly depending on a company’s regional footprint, relative cost position, and role in the value chain. To help the overall industry and individual companies address the current challenges, BCG has developed a comprehensive aluminum-industry CEO agenda comprising ten actions items. (See Exhibit 11.) This
  • 19. The Boston Consulting Group | 17 agenda provides a comprehensive and practical starting point for setting the priorities of industry executives as well as government policymakers whose national or regional economies are influenced by the industry’s performance. Taking Concerted Action Globally and in China Industry-level actions involve concerted inter- ventions to manage primary smelting capac- ity outside and inside China. To make the necessary changes happen, new forms of co- ordination will be required among primary producers outside of China, as well as among Chinese stakeholders and their counterparts in the rest of the world. Creating Viable Industry Structures Outside of China. The aluminum industry outside of China faces challenges that primarily stem from significant structural issues that can only be addressed through a wide range of industry-level actions. In recent years, some companies have added capacity while not removing unprofitable and only marginally profitable smelters from the market. In the aggregate, strategies that seek to optimize individual businesses can weaken the overall industry if they create overcapacity that promotes price erosion. Indeed, optimization efforts aimed solely at the company level pose a major threat to the industry. Understandably, no company wants to be the first to significantly reduce capacity, because it cannot predict how its competitors will re- spond. A first mover’s actions (whether to re- duce capacity or slow the pace at which it adds capacity) could ultimately be advanta- geous to the competition, which will reap the benefits without sharing the costs. In the alu- minum industry, there is neither a high level of trust in companies’ collective ability to re- solve the structural issues nor a strong sense of shared responsibility for dealing with the issues head-on. In addition to taking an aggressive approach to shutting down capacity, the industry must take a more proactive approach to managing the addition of new capacity. The sluggish economy in many regions will no doubt re- Aluminum CEO agenda Address supply-side issues in China Create viable industry structures outside of China Capture opportunities in the value chain Industry-level agenda Enterprise-level agenda Achieve enterprise excellence Obtain regulatory support for industry actions Create a new company for marginal assets Create an industry leader through M&A Systematically internationalize Chinese primary-aluminum production Accelerate removal of highest-cost Chinese capacity Explore upstream opportunities in bauxite and alumina Focus on high-value or lowest-cost downstream businesses Raise cost excellence to a fundamentally new level Radically improve management of large-capex projects Achieve commercial excellence Source: BCG analysis. Exhibit 11 | Ten Action Items for the Aluminum Industry CEO Agenda
  • 20. 18 | The Aluminum Industry CEO Agenda, 2013–2015 sult in the delay or even cancellation of some projects. Even accounting for the probability of delays and cancellations, however, up to 6 to 7 MMT of additional smelting capacity could be added outside of China by 2017, as noted above. Much of this capacity will have a competitive cost position; some of it is in- tended to serve purposes beyond smelting, such as attracting the downstream industry or promoting economic diversification and job creation. As a result, we expect that any efforts to significantly reduce planned capac- ity buildup will be difficult to undertake. Nonetheless, companies should make con- certed efforts to best align future additions to capacity with the realities of the market. Governments and regulatory bodies should help the indus- try in its restructuring efforts. Leaders will have to adopt innovative ap- proaches in order to implement a significant restructuring of capacity throughout the in- dustry. Three action items on our CEO agen- da address this imperative: Create an industry leader through M&A.•• In times of reduced demand, an industry is better off if a clear market leader removes excess capacity instead of participating in a ruinous price war with other companies. The world’s largest steelmaker, for example, has successfully assumed a stewardship role in its industry. During the recent economic crisis in Europe, this industry leader removed much more capacity than its competitors, thereby helping to prevent an even greater decrease in steel prices. In contrast, the aluminum industry lacks a clear market leader—each of the top three primary- aluminum companies has roughly a 15 percent market share. Consolidation through M&A—whether through one transaction or a series of deals—could cre- ate a company with the market leadership required to undertake capacity rational- ization efforts autonomously. As with any M&A deal, the consolidation must make economic sense for the entities involved and must create value. The cost savings through synergies and the revenue uplift through improved pricing will need to exceed the costs of completing the M&A transaction and shutting down capacity. Create a new company for marginal assets.•• The financial services industry has addressed its significant issues related to nonperforming assets by creating so- called bad banks, which acquire these assets at market price. By transferring its nonperforming assets to a bad bank, a financial institution removes the assets from its balance sheet and takes a write- down. Companies in the aluminum industry could apply a similar strategy by creating a new business in order to acquire marginal assets. Before using this approach, organizations would have to address several issues, including the ownership structure of the new company, the means of transferring and valuing the assets, and the exit strategy for the new company. Obtain regulatory support for industry•• actions. Governments and regulatory bodies should help the industry in its restructuring efforts by creating legal constructs that allow the burden of capacity reduction to be spread among different companies. An example of such a construct on a national level is Germany’s “structural crisis cartel,” which succeeded in removing structural overcapacity from the country’s steel and shipbuilding industries. The aluminum industry must also convince national and local govern- ments that capacity cuts are unavoidable and that previous approaches—such as providing additional energy subsidies to keep inefficient, high-cost plants margin- ally profitable—aggravate capacity problems rather than solve them. To make the required measures politically accept- able, stakeholders must develop approach- es to address the needs of workers who will lose their jobs. Addressing Supply-Side Issues in China. To address challenges arising from China’s abundance of smelting capacity, the global
  • 21. The Boston Consulting Group | 19 industry should seek to hasten the removal of the country’s high-cost capacity while also encouraging Chinese companies to relocate their capacity to other countries. China has been modernizing its aluminum industry in recent years by taking out of ser- vice many of the small, subscale smelters op- erating with outdated technologies. It is re- placing these with large-scale smelting operations run by professional enterprises in accordance with world-class standards. Even so, there remains a substantial opportunity to shut down more of the old, inefficient smelt- ers still operating throughout China. These smelters could be replaced, in part, with sub- stantially lower-cost capacity within China or elsewhere. Accelerating the removal of high-cost capac- ity will require significant concerted action by the Chinese central government in close co- operation with regional and local govern- ments. For example, these governments would need to work together to enforce high- er operating standards for aluminum smelt- ers. This could be accomplished through addi- tional tax levies on smelters that operate above specified levels of cost or carbon diox- ide emissions. (High-cost smelters typically have the highest emission levels.) Govern- ments could also withdraw incentives provid- ed to keep marginal capacity in business, thereby raising these smelters’ costs even fur- ther so that their operations were no longer financially viable. The central government must be prepared to address strong opposi- tion to plant closures from local government officials under pressure to preserve and pro- mote employment and economic growth. Pre- vious smelter closures in China, as well as in mature economies such as Germany, present lessons for mitigating negative regional im- pacts, such as through workforce redeploy- ment initiatives. While overcapacity is a more significant issue outside of China than within, China could be an important part of the solution. China is ex- pected to remain self-sufficient in primary aluminum and to control as much of the val- ue chain as possible. However, a clear distinc- tion with regard to self-sufficiency should be made between operations within China’s na- tional boundaries and the operations of Chi- nese companies globally. China’s alumina- sourcing and production strategy is a good example of this distinction. China will likely become more dependent on imports, but these imports will be provided mainly by companies that are owned and controlled, at least in part, by Chinese companies. The same scenario could be applied to prima- ry aluminum. Although some projects in western China will have very competitive cash costs, other planned smelters will still have far higher costs than the global average outside of China. Instead of building these high-cost smelters, Chinese companies could redirect part of their primary-aluminum in- vestments to lower-cost regions outside of China, where local aluminum companies may welcome international coinvestors. If Chinese companies invested in smelters abroad that have already been planned, they could avoid building additional capacity within China, thereby reducing the amount of new capacity globally. China can be an important part of the solution to the issue of global overcapacity. This scenario could promote a win-win situa- tion for all stakeholders, since the industry as a whole would benefit from less overcapacity. New smelters outside of China would get im- mediate access to the large Chinese market and its highly diverse customer base. And, by reducing their dependence on domestic capac- ity, Chinese companies would diversify their regional exposure and the related risks. Be- cause they would still control the value chain, Chinese companies could capture the full val- ue created by a domestic industry that con- verts and fabricates downstream aluminum. To make this opportunity a reality, foreign governments and the aluminum companies operating within their countries will need to involve their Chinese counterparts in multi- lateral discussions to identify potential op- portunities for Chinese companies to invest
  • 22. 20 | The Aluminum Industry CEO Agenda, 2013–2015 in smelters abroad. International stakehold- ers must be prepared to demonstrate to Chi- nese officials that China will benefit from di- versifying its ownership and control of aluminum capacity internationally. To be per- suasive, international players must present a compelling long-term value proposition. A useful model could be Japan’s success in in- vesting internationally while it was reducing domestic smelting capacity. These stakehold- ers must also develop a master list of projects in which China could participate, including both ongoing and future projects. In addition, the parties will need to clearly define China’s role and that of the other partners in interna- tional projects. Capturing Opportunities and Achieving New Levels of Business Excellence Individual aluminum companies will need to take radical steps to improve their own per- formance while alleviating the industry’s cri- sis. Companies should regard bauxite and alumina as offering very attractive growth opportunities, while the downstream market could provide attractive opportunities for emphasizing high value and superior capabil- ities or low costs and superior service. All companies, irrespective of their position along the value chain, will be forced to take a fundamentally new look at opportunities for quantum-leap improvements in cost reduc- tion, capex management, and commercial ex- cellence. New Opportunities Upstream and Down- stream. Until the global overcapacity of smelting is reduced, companies will struggle to earn high returns in this part of the value chain. The upstream and downstream mar- kets could offer particularly fertile ground for value creation. What actions should industry executives consider in order to capture these opportunities? In the near term, the upstream segments of the value chain will be more attractive than smelting. The supply of bauxite and alumina will continue to be more constrained than the supply of primary aluminum. Because bauxite mining and alumina refining are also relatively concentrated industries, they are more likely to have better industry discipline with respect to capacity and pricing. More- over, the price of alumina is becoming in- creasingly decoupled from the price of pri- mary aluminum. Until recently, pricing in most alumina contracts was based on a for- mula that applied a percentage of the LME price of aluminum, but pricing is now in- creasingly based on alumina spot indices that are not tied to aluminum’s LME price. As a result, pricing dynamics of alumina will develop on the basis of the material’s own strong market fundamentals, not those of the oversupplied aluminum market. Because current supplies will not be suffi- cient to satisfy China’s increasing demand for bauxite and alumina, large investments in new capacity will be required worldwide. While Chinese primary-aluminum companies are expected to continue to pursue backward integration in the value chain, Western com- panies should seek new opportunities to sup- ply Chinese smelters with alumina or to en- gage in joint mining and alumina projects with Chinese partners. The upstream and down- stream markets offer fertile ground for value creation. Large traditional aluminum players have par- ticularly strong expertise in bauxite mining and alumina refining, including experience in exploration, mine operations, and logis- tics—as well as in working effectively with the host governments of rapidly developing economies (RDEs). Their expertise will make it possible for large companies to over- come the following upstream-market chal- lenges that create entry barriers to other players: More stringent licensing procedures in•• many countries have made it harder to obtain access to bauxite deposits. Higher licensing fees, among other factors,•• have increased the cost of operating bauxite mines.
  • 23. The Boston Consulting Group | 21 Capex required to develop new mines and•• refining capacity have increased. Governments of bauxite-rich nations•• require mine operators to participate in national programs for infrastructure investment and economic development in return for obtaining access to their national resources. Smelter operators as well as mining and re- fining companies can pursue initiatives to capture upstream opportunities. Smelter operators should conduct a thorough review of their alumina-supply strategy with an eye toward pursuing backward integration. By increasing their ownership of mines and re- fineries, smelters can better manage their ex- posure to supply risks and reduce their need to negotiate contracts with powerful suppliers in the concentrated upstream market. They can also capture value from the more attrac- tive market conditions that favor upstream businesses. The objective is to create a supply portfolio with the optimal mix of owned and contracted sources and exposure to country- specific risks. The strategic review should con- sider both existing contracts with suppliers and current supply streams from owned mines and refineries. Smelter operators should com- pare the prices they will pay for alumina given their current portfolio of owned and contract- ed sources with a forecast of those prices un- der different scenarios. The output of the re- view should guide future contract negotiations and investment decisions. Owners of mines and refineries should devel- op a supply-and-demand model for the alumi- na market over the next ten years. This should include determining an updated forecast of alumina demand for both China and the rest of the world, identifying alumina consumers globally, and assessing the extent to which these consumers will own or buy alumina sup- plies. Executives should also identify the loca- tions of potential new mining operations. Companies can use this market model as the starting point for defining their strategy. The strategic agenda should include planning for expansion, determining a competitive cost base, and identifying opportunities for joint ventures with customers (such as Chinese companies). Companies should also use the market model to determine the investment model and ownership structure of future mining and refining assets. Additionally, upstream operators should ad- dress their cost base more aggressively and systematically. As noted above, mining has become increasingly expensive. This creates the need to manage costs more aggressively in order to ensure the competitiveness of products. Players in the upstream part of the value chain can capture the greatest potential from cost management because they have typically been the least forceful in this area. Upstream operators need to manage costs aggressivly to ensure competitiveness. Finally, mining and refining companies should accelerate their efforts to decouple the prices of alumina and aluminum by enforcing an independent alumina-pricing mechanism. This will allow them to capture the full up- side from the favorable market conditions discussed above. They should use this inde- pendent price in transfers among mines, re- fineries, and smelters. Opportunities in the value chain’s down- stream segments also warrant close attention. In recent years, operations in low-cost coun- tries have redefined the global production- and-supply landscape of many downstream products. Multinational companies active in flat-rolled products, extrusions, and castings have diversified their production networks to include an increasing number of manufactur- ing sites in cost-advantaged regions such as China, Eastern Europe, and Latin America. These facilities were established to enable sales in fast-growing domestic economies, as well as to provide lower-cost supply hubs for global export markets. At the same time, domestic producers in RDEs are increasingly exporting their prod- ucts in order to compete head to head with
  • 24. 22 | The Aluminum Industry CEO Agenda, 2013–2015 incumbent suppliers around the world. These challengers are constantly improving their technical and commercial capabilities to serve markets globally, while buyers are in- creasingly willing to source from them. As we have discussed, China has established itself as a major force in the global supply of downstream products—not only semi-finished products but also end products. Examples of China’s reach into the global market include aluminum extrusions for architectural proj- ects; aluminum foil for household, commercial, and industrial applications; and finished prod- ucts such as garden furniture, picture frames, and automotive wheels. The globalization of down- stream products creates chal- lenges and opportunities. Some countries have restricted low-cost im- ports; for example, the U.S. has limited im- ports of aluminum extrusions from China. However, these trade-related interventions are not likely to stop the globalization of downstream supply, especially as multina- tionals from mature economies increasingly set up production in RDEs. For many alumi- num-product segments, downstream busi- nesses will no longer be operated on a local or regional basis. The globalization of downstream aluminum products creates substantial challenges and opportunities for incumbent players. To suc- ceed, these companies must either develop the most competitive offering for commod- itized products that do not benefit from hav- ing production located close to customers or maximize the differentiation of their prod- ucts, services, and brands. Companies based in RDEs must substantially strengthen their capabilities in order to mature from interna- tional challengers to global leaders. Both incumbents and challengers should ​ assess their strategies for capturing opportu- nities in the changing downstream land- scape. Incumbents should conduct a thorough review of their current and future competitive land- scape, assessing the international threat and potential opportunity for each line of business, product family, region, and customer relation- ship. This should include the extent to which sales and profits are or will be challenged by companies from RDEs, as well as the nature of the threat in terms of superior cost, differenti- ated products, and differentiated sales and marketing. Companies should also identify lines of business that appear to be safe from competitive threats and determine how these lines can position themselves as the best sup- pliers to meet customers’ needs. These established companies should fine-tune their strategies on the basis of this assessment and define the appropriate implementation initiatives. The assessment could confirm that the current business model is competitive and suggest ways to improve it for long-term sus- tainability and resilience. Alternatively, it could trigger a radical overhaul of the strategy so that the company can significantly improve cost competitiveness (including international low-cost options) or focus on a substantially different product mix that better enables com- petitive differentiation. Challengers from RDEs will need to substan- tially upgrade their business models to fully capture international growth opportunities. Although many of these companies already sell products abroad, few are properly set up for aggressive global expansion. To position themselves, they must develop and systemati- cally deploy a well-defined international growth strategy and design a product portfo- lio fine-tuned for the international market. They must also define a robust supply-chain model that meets the service requirements of the international customer base, as well as a go-to-market approach that will reach the right buyers. Often, the biggest challenge is creating an organization truly equipped for international business development, includ- ing senior managers with significant interna- tional business experience and a culture that will ensure global success. Achieving Enterprise Excellence in Three Dimensions. To achieve and sustain a com- petitive advantage, companies must substan-
  • 25. The Boston Consulting Group | 23 tially raise their game in three critical dimen- sions of business performance: operating and overhead costs, capex management, and commercial activities. Aluminum companies must deploy truly rigorous and holistic lean programs. The objectives of continuously reducing oper- ating and overhead costs, improving energy efficiency, and increasing the productivity of capacity are central to the performance cul- ture of every operator throughout the alumi- num value chain. Companies that make their operations leaner can also achieve the flex- ibility required to align production with mar- ket needs and are often able to provide supe- rior service and quality levels. However, most aluminum companies have al- ready captured the opportunities available through the traditional means of achieving operational excellence. Only a few companies have been able to create sustainable world- class operations. Some companies attain only limited benefits from lean operations be- cause their programs are overly broad and lack the required depth. In many cases, the necessary capital, manpower, and analytical tools to apply lean operations effectively are not available. Even when companies achieve dramatic improvements initially, they may struggle to sustain momentum. To raise oper- ational excellence to a new level, aluminum companies must deploy truly rigorous and holistic lean programs—from the production floor to the head office and from short-term campaigns to initiatives designed to achieve significant and lasting change. This should entail taking a close look at other industries to ensure that the company is adopting the leading practices for operational excellence. In BCG’s experience, companies can reach an advanced level of lean operating perfor- mance by refocusing on fundamentals and pursuing smaller and faster initiatives. Given the severe financial pressures that aluminum companies currently experience, it is vital to rapidly achieve visible impact. A quick lean health check can identify a handful of fo- cused changes that will significantly improve costs and performance. Companies can see major savings in specific areas within months. Based on our experience along the aluminum value chain, the best opportunities for im- provements can typically be found in the fol- lowing areas: Procurement,•• by optimizing and renegotiat- ing the contracts for major consumable categories and service contracts Repair and maintenance,•• by redefining the related requirements and procedures, and improving sourcing costs and process productivity Inventory management,•• by setting the right levels of buffer stocks, streamlining materials flows, and improving operations planning and demand forecasts Logistics,•• by boosting warehouse produc- tivity and minimizing freight costs Overhead costs,•• by eliminating, consolidat- ing, or streamlining administrative functions in plants and in regional, business unit, and headquarters offices The key is to pick the most effective improve- ment levers by weighing the tradeoffs among them and deciding which ones to tackle im- mediately. Given the situation’s urgency, it is important that aluminum companies focus on a small number of areas that are easy to analyze, that can typically be addressed with- out major capital investments, and that al- most always have room for improvement no matter how much attention was paid to them in the past. (See Lean in Industrial Goods: Driv- ing to Breakthrough Performance, BCG report, September 2011.) In addition to managing operating costs, alu- minum companies (especially those from ma- ture markets) need to find ways to signifi- cantly reduce their capex. Aluminum operations are far more capital intensive than copper or steel plants and are among the most expensive to build—requiring capi-
  • 26. 24 | The Aluminum Industry CEO Agenda, 2013–2015 tal investments of $5 billion to $10 billion in the case of new smelters. Western companies suffer from a distinct disadvantage regarding capex levels, as their Chinese counterparts often only require half as much capital to build plants with similar levels of capacity and operating efficiency. What’s more, oper- ating profits must be higher year after year to offset unnecessarily high capex during a project’s development phase. To ensure the competitiveness of an asset base that will last for decades, Western companies should take all possible steps to close the gap be- tween their capex levels and those of Chi- nese companies. To improve their execution of large-capex projects, some companies have implemented quality control programs, issued more fre- quent project-status updates, and transferred a larger component of the risk to outside con- tractors. While such measures can help, they often do not address the core need for a new approach to project management. Comprehensive risk manage- ment for large-capex projects is increasingly important. BCG has identified eight levers that compa- nies and contractors can apply to ensure that their large projects are completed at competi- tive capex levels, on time, on budget, and within required quality parameters. (See Eight Key Levers for Effective Large-Capex-Project Management: Introducing the BCG LPM Octagon, BCG report, October 2012.) For aluminum companies, three of these levers are especial- ly important for making fundamental im- provements to large-capex-project manage- ment: minimizing capex needs, rigorous risk management, and securing scarce resources and local content: Minimizing Capex Needs.•• Companies should make their value requirements clear to contractors and equipment providers to ensure that the technical specifications and proposed solutions are truly aligned with the project’s needs. This includes the use of value engineering to ensure that new facilities are not over­ designed and that the full range of possible technology and equipment options (including providers in low-cost countries) are being considered. Rigorous Risk Management.•• Comprehensive risk management for large-capex projects is increasingly important because many new aluminum plants are built in remote locations and global supply chains, and vendor arrangements for engineering, procurement, and construction have become increasingly complex. Clear guide- lines should be set to define acceptable levels of risk exposure and ensure that portfolio policies are aligned with the strategic vision (such as the maximum size of projects, capex per year, and other metrics). A clear ranking according to risk and value will help optimize investment decisions. At the project level, the com- pany should exercise ultimate control over risks even when a contractor is in charge of implementation. This entails under- standing risks at each step of the project, classifying them by severity and likeli- hood, determining options to mitigate each risk, and implementing a forward- looking reporting system to allow proac- tive intervention. Securing Scarce Resources and Local Capa-•• bilities. Most industrial sectors expect sustained growth over the next decade, and companies are developing many large projects, often located in the same regions of Asia, Africa, the Middle East, and Latin America. As a result, companies have to compete for skilled human capital, natural resources, infrastructure, and critical equipment. Securing access to scarce resources and local capabilities, especially in areas with a high concentration of projects, will be essential. Traditionally, aluminum companies’ performance culture has centered on the manufacturing function. Companies evaluate their level of excellence based on manufacturing KPIs, such as costs, tonnage produced, productivity, and uptime. At the same time, they have devoted scant attention
  • 27. The Boston Consulting Group | 25 to understanding how to best serve their customers’ needs. To improve their overall performance in to- day’s business environment, aluminum com- panies must follow the lead of consumer goods companies and transition to a culture that emphasizes understanding customers’ evolving needs and quickly tailoring offerings to meet these needs. Companies that success- fully adopt a “customer back” approach can use value-added offerings and premium ser- vices to free themselves from the constraints of selling a commodity. They will be able to set price premiums to reflect the value of tai- lored offerings and increase market share by achieving higher levels of customer satisfac- tion and loyalty. The objective is to develop a premium brand that is recognized for provid- ing a better solution and more value, not just a quantity of aluminum. Commercial excellence requires creating a customer-focused mindset and a professional marketing and sales function with capabilities in researching customer insight. To inform de- cision making, marketing and sales must un- derstand what customers consider important, the problems they need to solve, the sources of their satisfaction or dissatisfaction with cur- rent offerings, and what makes them loyal. These insights can then be fed back into the product design and manufacturing process to create customized offerings that capture the value of improved service. Companies should also gather competitive intelligence to under- stand how well competitors are meeting cus- tomers’ needs, as well as the opportunities for better meeting these needs. Companies must design KPIs and incentives relating to areas that promote customer satis- faction, such as delivery speed, reliability, and flexible service. They also need to create fo- rums and processes for cross-functional col- laboration that enable the manufacturing and marketing and sales functions to inte- grate their activities. And the marketing and sales team must build stronger external ties with customers’ procurement teams to devel- op long-term strategic relationships as a sup- ply chain partner. Leading aluminum companies have already begun to transition to a customer-centered culture. They have created customer insight teams similar to those used by consumer goods companies, and they have developed sophisticated pricing schemes that reflect the higher value of specific service offerings. In addition, they have created market sector teams to consider the specific needs of, for example, automotive, industrial, or packaging customers, so that they can tailor offerings to these customers’ different needs.
  • 28. 26 | The Aluminum Industry CEO Agenda, 2013–2015 SETTING THE AGENDA ALONG THE VALUE CHAIN Companies throughout the ­value chain must set a new strategic agenda in response to the fundamental changes in the aluminum industry landscape. This does not mean that they should assume an exclusively defensive posture. All companies have an opportunity to play offense by identifying and capturing opportunities that arise from the industry’s crisis. Upstream: Pursue High-Value Opportunities in Bauxite and Alumina To benefit from the attractive opportunities in the upstream segment, executives should identify ways to capture value in bauxite mining and alumina refining and design ini- tiatives for putting the strategies into prac- tice. As a first step in setting the agenda, ex- ecutives should consider the following questions: Do we clearly understand how China’s•• aluminum strategy will affect our access to bauxite and alumina and the price of these raw materials? Do we have a strategy in place that•• enables us to capture the full upside of the future opportunities in bauxite and alumina while protecting us from possible downsides? For smelters: have we assessed whether it•• is beneficial to integrate backward by acquiring mines and refineries or expand- ing our existing upstream investments? For mines and refineries: given the•• uncertainties about China’s upstream strategy and the alumina needs of non- Chinese smelters, what is the right investment strategy? How much upstream capacity should we invest in, at what cost, where, and with whom? Smelters: Take Bold Actions to Ensure Long-Term Viability To ensure the long-term viability of their part of the value chain, smelter operators must make radical moves to achieve a significant industrywide turnaround and substantial im- provements in company performance. The following questions can guide the agenda- setting process: Do we have an actionable strategy for our•• smelter portfolio as a whole and for each location, enabling us to address the challenges and capture the opportunities at hand? Do we clearly understand the implications•• of China’s aluminum-industry strategy for our business over the next five to ten years?
  • 29. The Boston Consulting Group | 27 What is the shape of the future cost curve•• and where are our assets positioned on this curve? How competitive are we under different supply-and-demand scenarios? Which costs have the most potential for•• substantial short-term reduction? How can we capture the full cost-reduction poten- tial quickly? What improvements can we make beyond•• operating costs? How can we effectively manage our capex? What are the opportu- nities to optimize the top line by focusing on what customers are willing to pay for? How can we contribute to implementing•• meaningful concerted industry actions? How can we become active in M&A, international partnerships, and govern- ment lobbying? Downstream: Capture New Upside Opportunities While Safeguarding the Baseline The downstream market faces a crossroads, as incumbent companies in developed mar- kets and challengers from RDEs compete for dominance. Incumbent companies must as- sess threats and take action to capture new opportunities while protecting their current lines of business. Challengers must elevate their international growth strategies and ca- pabilities organizationwide to grow their businesses internationally. Executives of incumbent players should con- sider these questions: Which lines of business, sales, and profits•• are or will be threatened by challengers from RDEs? Does the threat from these challengers•• relate to superior cost, innovative prod- ucts, distinctive sales and marketing, or other issues? Which lines of business appear to be•• protected from these threats and why? Which products or services do customers•• consider to be truly important in our more secure lines of business? How can our company best position itself as their supplier? Executives of challengers from RDEs should consider the following: How long will our current competitive•• advantage over incumbent players last before it erodes because of labor cost increases, for example? How can we gradually move from our•• current product portfolio to higher value-added products? Which products are the most promising? Beyond our home market and current•• regional reach, which locations are the most promising for expansion given our current competitive advantages? What are the specific customer needs in•• these potential new markets and how can we develop the capabilities required to serve them successfully? For all companies along the value chain, the answers to these questions will point to op- portunities to make significant course correc- tions in their strategic agenda. The resulting performance improvements will provide a critical source of competitive advantage for individual companies and help to reorient the aluminum industry’s outlook from crisis to prosperity.
  • 30. 28 | The Aluminum Industry CEO Agenda, 2013–2015 for further reading The Boston Consulting Group has published other reports and articles on the topics covered by this report that may be of interest to senior ex- ecutives. Examples are listed here. Taking the Long-Term View in Turbulent Times: Value Creation in Mining 2012 A report by The Boston Consulting Group, January 2013 Capital Procurement: The Cornerstone of Successful Projects A Focus by The Boston Consulting Group, October 2012 Eight Key Levers for Effective Large-Capex-Project Management: Introducing the BCG LPM Octagon A Focus by The Boston Consulting Group, October 2012 Lean in Industrial Goods: Driving to Breakthrough Performance A Focus by The Boston Consulting Group, September 2011
  • 31. The Boston Consulting Group | 29 note to the reader About the Authors Thomas Bradtke is a partner and managing director in the Dubai office of The Boston Consulting Group. Filiep Deforche is a senior partner and managing director in the firm’s Brussels office. Roman Deniskin is a partner and managing director in BCG’s Moscow office. Marc Gilbert is a senior partner and managing director in the firm’s Toronto office. Ketil Gjerstad is a partner and managing director in BCG’s Oslo office. Kai Gruner is a senior partner and managing director in the firm’s Stockholm office. Dirk Harlacher is a project leader in BCG’s Cologne office. Alexander Koch is a partner and managing director in the firm’s Perth office. Knut Olav Rød is a partner and managing director in BCG’s Oslo office. Acknowledgments The authors would like to thank Stephen Amery, Eric Boudier, Victor Du, Mark Freedman, Knut Haanæs, Dirk Harlacher, Roland Haslehner, Andreas Jebsen, Øystein Kvaale, Alona Nemyrovska, Felix Schuler, Philip Ernst Schulze-Smidt, Felix Stellmaszek, and Gustav Terland for their contributions to the research included in this report. The authors are also grateful to David Klein for his writing assistance and to Katherine Andrews, Gary Callahan, Sarah Davis, Kim Friedman, Abigail Garland, and Sara Strassenreiter for their contributions to editing, design, and production. For Further Contact For further information about the report, or to learn more about BCG’s capabilities with regard to the aluminum industry, please contact one of the authors: Thomas Bradtke Partner and Managing Director BCG Dubai +971 4 4480 409 bradtke.thomas@bcg.com Filiep Deforche Senior Partner and Managing Director BCG Brussels +32 2 289 02 18 deforche.filiep@bcg.com Roman Deniskin Partner and Managing Director BCG Moscow +7 499 7553 286 deniskin.roman@bcg.com Marc Gilbert Senior Partner and Managing Director BCG Toronto +1 514 448 7464 gilbert.marc@bcg.com Ketil Gjerstad Partner and Managing Director BCG Oslo +47 21 04 6766 gjerstad.ketil@bcg.com Dirk Harlacher Project Leader BCG Cologne +49 221 55 00 50 harlacher.dirk@bcg.com Kai Gruner Senior Partner and Managing Director BCG Stockholm +46 8 402 4403 gruner.kai@bcg.com Alexander Koch Partner and Managing Director BCG Perth +61 8 6364 4312 koch.alexander@bcg.com Knut Olav Rød Partner and Managing Director BCG Oslo +47 21 04 6766 rod.knutolav@bcg.com
  • 32. © The Boston Consulting Group, Inc. 2013. All rights reserved. For information or permission to reprint, please contact BCG at: E-mail: bcg-info@bcg.com Fax: +1 617 850 3901, attention BCG/Permissions Mail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcgperspectives.com. Follow bcg.perspectives on Facebook and Twitter. 6/13
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