05 November 2003 08:58
China and Russia are waiting in the wings
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 $1,315 per tonne seen in April, last week's aluminium price topped
$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 $1,700 a tonne. Although this would represent a strong rally, it would
not exceed the high point of $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 ?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 $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.
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