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Rio Tinto Moves Away From Paraguay

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Following its decision to close its aluminum smelting operation in Australia last week, Rio Tinto (NYSE: RIO  ) announced yesterday it was shelving plans for an aluminum plant in Paraguay, too. Aluminum pricing remain depressed, and despite greater demand for the metal from the global auto industry, it still trades about 15% below where it did a year ago, suggesting it will be the second time in three years that prices have closed lower than where they started.

The plant was scheduled to open in 2016, and would have been Rio Tinto's largest facility worldwide, with the capacity to produce 674,000 tons annually. But a market that remains flush with inventory exhibited too much pressure for the miner to go forward.

That weak market was behind BHP Billiton's (NYSE: BHP  ) decision to sell its 33.3% stake in Guinea Alumina, the joint venture it operated with Global Alumina, to Dubai Aluminum and Abu Dhabi's state-owned Mubadala earlier this year. Vale (NYSE: VALE  ) also sold its 22% stake in Norsk Hydro while Chinalco (NYSE: ACH  ) suspended its Malaysian smelter project. Rio Tinto itself wanted to sell its Pacific Aluminum division, but was unable to find a buyer in this market for it.

Yet Russian aluminum giant Rusal remains bullish, believing pricing will strengthen in the near future because of a developing supply deficit that's resulted from producers cutting back on production. Outside of China, Rusal sees the deficit at under a half million tons at the moment, but surging to 1.3 million tons next year and as much 2.4 million tons in 2017.

China, though, is the linchpin to both the industry's future and its current problems. The country accounts for 45% of global aluminum consumption, a figured expected to grow to 56% by 2025, but it's also largely self-sufficient in bauxite and alumina so that increases in aluminum production -- China accounts for about 46% of global supply -- have weighed heavily on the market. Analysts see China growing to more than 50% in the near future, reaching as much as 42 million tons.

While having to shelve the smelter plans now is unfortunate, Rio Tinto's woes would have been worse had it not done so. And if it helps tilt the worldwide inventory scale more toward a deficit, then none of the aluminum producers will mind very much at all.

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