Things don’t look good for the aluminium industry, what with the prices of the metal at a new low of $1,981 a tonne in 2011, a level that was last seen in July 2010. Prices have fallen by 29% from their 2011 highs and show no signs of easing.

Photo by Dmitry Beliakov/Bloomberg; graphic by Yogesh Kumar/Mint

When aluminium makers declared results for the September quarter, they said many global smelters were not even recovering operating costs at prevailing market prices. Prices have fallen further from those levels; the level of unviability has only increased.

The timing of this precipitous fall is unfortunate. The sharp increase in prices in the past few years actually brought back a lot of shuttered smelters on the market. Capacity additions, too, have happened in this period. The result is higher production during a period of rising prices. In the January-October period, global aluminium production is up 5.9% year on year, according to the International Aluminium Institute.

Producers believe the fundamentals for aluminium still remain strong. Alcoa Inc. expects emerging markets to contribute to growth in demand, according to presentations made to investors in November. It expects the global demand-supply balance to tighten, China to become a net importer of aluminium, and also expects emerging markets to face challenges in bringing new capacity on stream.

In India, it expects coal shortages, bauxite shortages and related bottlenecks to lengthen project start-up delays. In China, it expects the high cost of power and higher cost smelters to limit its expansion efforts.

United Company Rusal Plc., another leading aluminium producer, too, expects prices to remain firm for these reasons, and also expects unviable aluminium capacities to shut, leading to a tighter supply situation.

How much of a buffer emerging markets can provide remains to be seen, especially as their economic growth is beginning to show cracks. Europe also seems to be lurching from one uncertainty to another, making it difficult to predict the bottom.

For Indian firms such as Hindalco Industries Ltd, Sterlite Industries (India) Ltd, and National Aluminium Co. Ltd, the December quarter is likely to see their domestic aluminium business performance worsen, compared with the September quarter. The fall in the rupee may provide some buffer to sales growth, but it will add to energy costs, whose prices track that of the landed cost of imports.

Their share prices already reflect this, touching a 52-week low last week, and are down by 50-60% from their high levels of the year. It may be tempting to think the worst is over, but that was what producers, too, were thinking a month ago.

If there is anything investors should have learnt from the previous slide in metal prices (after the 2008 financial crisis), it should be to watch the mayhem safely from the sidelines.