We are currently forecasting an average cash London Metal Exchange (LME) price for aluminium in 2001 of $1,500 a tonne or 68 cents a pound. That compares with a 2000 average of around $1,548 a tonne (70.2 cents a pound) and a 1999 average of $1,362 a tonne (61.78 cents a pound). There are three main reasons for our caution about 2001.

The first is that we are seeing a fairly hard landing for the U.S. economy in 2001. This coincides with economic slowdowns in Europe and Asia. So aluminum consumption, in our opinion, is likely to fall by at least 1 to 2 percent in 2001, which equates, on a global basis, to a loss of between 250,000 to 500,000 tonnes.

The second reason for our caution is that primary production should rise by around 800,000 tonnes a year in 2001. This increase, the biggest increase since 1992, is from a combination of greenfield and brownfield expansions. That increase combined with the drop in consumption will more than cancel out the loss of production in the Pacific Northwest.

The Pacific Northwest is bullish, in our view, on a longer-term basis. We have lost more than 500,000 tonnes a year of production in the Pacific Northwest already. And the lower aluminum prices stay, particularly from October 2001 onwards, the more certain we can be that we will see more production cuts in the Pacific Northwest. This is particularly so if electricity prices remain at or above $50 a MWH.


These cuts are certainly not bearish! They will help to underpin aluminum prices. But unless consumption growth is really taking off, which requires a strong U.S. economy with robust growth again in the transport and construction sectors, the cuts in themselves are not enough, in our opinion, to send aluminum prices soaring.

Aluminum industry depends on auto industry

The aluminum industry is crucially dependent on the automotive industry for its growth. Unit aluminum consumption in cars has been showing an annual growth rate of around 6 percent a year and has shown no signs of slowing down.

Nor has the volume of car sales. General Motors said last year that it expects worldwide vehicle volumes to grow from 50 million in 1998 to 65 million vehicles by 2008.

The automotive industry wants both stable and low prices. The more volatile aluminum prices are, the less the automotive industry wants to use aluminum in its long-term model plans. A model platform is usually for six to seven years.

Total primary aluminum usage at present in cars is around 30 to 40 percent of the total aluminum used, depending on which region you are in. But primary usage is now growing much more rapidly in the form of sheet and extrusions. This is particularly true for the fast growing sports and utility vehicle section of the market.

That has to be good news for more primary aluminum being consumed as well as secondary. The gains in average unit use in kilos per car are absolutely breathtaking. In Western Europe, we expect to see a rise of 30 kilos per average car between 2000 and 2005. That is a gain of 33 percent. (A kilo is 2.20462 pounds.) In North America, a jump of 35 kilos per average car is expected, a gain of 25 percent. In Japan, a rise of 22 kilos per average car is expected. This is a rise of 21 percent.

Looking at the rises between 1995 and 2000, the figures are just as breathtaking. In Western Europe, the rise was 29 kilos or 47.5 percent. In North America, the rise was a massive 43 kilos per average car or a rise of 45 percent. In Japan, the rise was 33 kilos or a 44.5 percent increase.

But, we hear you ask, can the growth picture in transport really be that wonderful? And the answer is a firm NO! The first problem is that not all of that consumption growth in transport is going to be from primary aluminum.

Secondary consumption as a percentage of primary consumption continues to rise. This is to be expected and is quite normal in all metal industries. But the automotive industry, in particular, is very keen on keeping as much metal as it can circulating within a closed loop. The average annual growth rate in secondary aluminum consumption during the 1990s has shown a stronger rate of growth at 3.6 percent versus 2.9 percent for primary And, as a percentage compared to primary consumption, it continues to grow quite rapidly and now stands at 47 percent.

The second big problem is the absolute need for the aluminum industry to always build enough new capacity to keep the car industry convinced that the aluminum industry can actually go on supplying the car industry with more and more aluminum each year at stable and fair prices.

To do this you need big bucks. The capital expenditure in dollars per tonne terms is scary It costs around $2,500 a tonne for brownfield expansions and anywhere between $4,000 to $6,000 a tonne for greenfield capacity. Demand for primary metal is growing at around 3.7 percent a year compound.