Buy high, sell low: The price of aluminium’s meltdown

Marc Sidwell
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RIO Tinto’s share price dropped sharply on its announcement of a $14bn (£8.7bn) impairment charge and the resignation of its chief executive Tom Albanese but the miner went on to recover most of that value over the course of the day, proving a certain amount of market respect for such decisive action.

What went wrong? Rio Tinto says $3bn relates to its Mozambique acquisition, for which Doug Richie, who led that project, has also resigned. This seems to have been the load that broke the camel’s back. But most of the loss, $10-11bn, related to further reductions to the group’s aluminium assets, bought under Albanese just before the crash in 2007.

In historical terms, few things have changed their value as comprehensively as aluminium. In the Paris Exposition of 1855, bars of pure aluminium were displayed alongside the French crown jewels. Napoleon III once gave banquets where the top table had aluminium cutlery and everyone else made do with gold. But aluminium is the most plentiful metal on earth; it was just that no one knew a cheap method to reduce its oxides and obtain the pure metal. In 1886, chemists discovered that secret, and now it can be used for throwaway drink cans.

Rio Tinto didn’t see quite such a drastic price fall in 2008, but it was still painful. Aluminium more than halved in value, falling from a top above $1.4/lb at the start of March 2008 to below $0.6/lb in early 2009. It has recovered, but still trades at only $0.9/lb. As a result, it isn’t surprising that Rio Tinto has now cumulatively written off two thirds of the $38bn purchase price. From a precious acquisition to throwaway assets indeed.

What a difference a day makes. After a storming performance from Goldman Sachs and JP Morgan, it was probably hard for Citi and Bank of America Merrill Lynch (BoAML) not to disappoint. However, while their results for the fourth quarter might appear lacklustre, there are signs of solidity beneath some one-off regulatory and legal costs hurting the headline numbers.

For instance, BoAML’s fourth quarter profit fell from $2bn the year before to $0.7bn in 2012, on $18.9bn of revenue. However, that is largely due to a $2.7bn settlement with US mortgage association Fannie Mae. In other respects, BoAML performed rather well – its fees were up by a fifth on the previous quarter and 58 per cent year-on-year.

Citigroup reported $1.2bn profit on $18.2bn in revenue, up from $0.956bn the year before on $17.2bn of revenue, missing estimates. But the quarterly results did include $1.3bn in legal fees. Over the year, its numbers also notably suffered from the $4.7bn writedown it suffered on its stake in the Morgan Stanley Smith Barney joint venture.

Wall Street is still recovering from the consequences of the financial crisis, but as those short-term effects pass out of the numbers, things should start to seem brighter.