05 November 2003 01:51
China and Russia are waiting in the wings: Western companies face more than one challenge, writes Rebecca Bream
The aluminium industryhas spent most of 2003 playing the waiting game,
hanging on for signs of recovery in the world economy and, therefore, in
demand for the metal.
At the end of last year, aluminium companies were hoping that 2003 would see
an upturn in prices on the world's metal exchanges, following many
months of depression. Prices dipped in the early part of this year, but have
since risen strongly. In contrast to the low point of Dollars 1,315 per tonne
seen in April, last week's aluminium price topped Dollars 1,500, the
best levels for more than two years.
Some of the price gain stems from speculation in the commodity markets, and
many observers are wary of declaring an aluminium recovery at this stage.
"All commodity prices are up," says Peter Blight, a metals analyst
at UBSW in London.
"The general view that signals of economic growth are getting stronger
means there is more speculative interest in the commodity markets."
But most aluminium company chief executives have been predicting that the
worst is over for prices, and Mr Blight agrees.
"There are some signs of more sustained growth in demand," he says.
UBSW's metals analysts are forecasting a rise of 5 per cent in average
aluminium prices for 2003.
Sluggish economic growth in North America and western Europe has meant that
demand for aluminium in many of its main markets - construction, the
aerospace industry and vehicle manufacturing - has been depressed for several
years.
Although the economic outlook remains unclear, innovations in aluminium use
mean that the metal is gaining ground on its heavier rival, steel.
For instance, more and more aluminium is going into the production of
high-class sports cars such as the Aston Martin Vanquish, and the new
Selfridges department store in Birmingham is a good example of its current
popularity in architecture.
Whatever the developments among aluminium customers, the metals market is
expecting the aluminium price to peak towards the end of next year.
Some analysts are forecasting a high of about Dollars 1,700 a tonne. Although
this would represent a strong rally, it would not exceed the high point of
Dollars 1,754 reached in January 2001.
"Hopefully, we saw the bottom of the market in 2002," says
Jon-Harald Nilsen, executive vice-president at Norsk Hydro and head of its
aluminium division.
"I have seen some improvement in earnings at Norsk Hydro but this is
through self-help rather than help from the market."
Mr Nilsen says the main challenge is the lack of visibility in terms of what
demand from customers will be, especially in Europe. Demand in the US is
looking better, he says, with companies adjusting their aluminium consumption
estimates upwards for the first time in two years.
Although aluminium prices are likely to keep rising, the factors governing
the rise are relatively complicated and there are still risks to take into
account.
"There are larger stockpiles of aluminium than of other metals, and
these have not been reduced by much," says Mr Blight at UBSW. Cutbacks
in the level of North American aluminium production because of high
electricity prices have helped to reduce excess capacity in the market, and
some predict that the high rate of Chinese production might now be slowing.
Smelting capacity is being expanded in other areas of the world, however,
from Russia to the Middle East and Africa.
UBSW forecasts that supply and demand will be balanced next year and, if the
expected level of economic growth materialises, there could even be more
demand for aluminium than supply in 2005.
But the industry has not been idle while waiting for a price recovery. As the
dominant aluminium companies have not been able to rely on strong demand for
its traditional products to generate profits, they have had to look at
different strategies.
Cost-cutting, expansion into lucrative areas such as packaging, and
consolidation have been the most common routes chosen by companies to bypass
their problems.
Aluminium is a relatively expensive metal to produce as it takes a lot of
electricity to turn ore into metal.
This is why aluminium smelters are concentrated in locations with access to
cheap energy, such as hydroelectric power.
But costs are inflated for many aluminium companies by the fact that the raw
materials - bauxite and alumina - are found many thousands of miles away from
where their smelters are situated, adding the expense of long-distance
shipping.
Although electricity and transport will remain a large proportion of the
costs of producing aluminium, companies have been making an effort to cut
less essential expenses.
Most of the large aluminium companies have introduced cost-cutting and
rationalisation plans.
Norsk Hydro's efficiency plan aims to make NKr 2.5bn of savings by the
end of 2004 and includes 1,700 job cuts from group's 27,000-strong
workforce.
In the company's primary aluminium business, the cost of smelting is
being targeted through its so-called "Alu-improver" programme, and
the efficiency project for rolled products has been dubbed "Let's
roll".
Mr Nilsen says he wants to concentrate on improving efficiencies before
looking at any acquisitions or other expansions.
"We would like to become the most profitable aluminium company in the
world," he says.
Arguably, the most significant development in the aluminium industry so far
this year has been consolidation.
Alcan's Euros 4bn takeover of Pechiney has been approved by shareholders
and regulators and will be completed later this month.
The deal will create the world's largest aluminium producer by revenues,
overtaking Alcoa of the US.
But the small group of integrated, western aluminium companies that will soon
comprise Alcan, Alcoa and Norsk Hydro face a challenge.
Rusal and Sual, the Russian aluminium producers, along with Chinese metal
companies, are expanding fast and are setting their sights on western
markets.
Rusal, for instance, is able to produce aluminium cheaper than its western
rivals thanks to its relatively low labour and energy costs.
Oleg Deripaska, the co-founder of Rusal, recently agreed to buy half of
partner Roman Abramovich's 50 per cent stake in the group for Dollars
2bn, leaving him with 75 per cent control.
Mr Deripaska has said he wants Rusal to be the world's number one
aluminium company and is planning to make changes - such as a stock market
listing - to help his group become a credible international operator.
[FTI [The Financial Times]] |
RUSSIA IN FACTS
