But as events have transpired, the aluminium prices at the London Metal Exchange have dipped below $1,300 in late July/early August and created a crisis of sorts.

To remain competitive in the aluminium marketplace, Alcoa, the leader in the global aluminium industry, has decided to curtail nearly 1,20,000 tonnes of primary metal capacity with effect from August 1.

Following the volatile price trends and sluggish demand, Alcoa has idled nearly 4,38,000 tonnes of its production out of its base production capacity of 3.9 million tonnes.

The other players are also likely to follow suit. The faster the industry is able to bring the demand-supply in balance, the better will be the price prospects for the metal.

Medium-term growth plans

As the fundamentals of aluminium rest on a fairly strong footing on a global scale, the need for the aluminium industry to consider medium-term growth strategies assumes great significance.

From this standpoint, the industry probably has to focus on:

However, over the past few months, the global aluminium majors have been creating new opportunities in the form of joint ventures with Chinese companies to enter one of the fastest growing markets in the world. For instance, in April, Alcan Inc announced an in-principle agreement to form a joint venture (with a 50 per cent equity stake) with the China-based Qingtongxia Aluminium Company which has set up a 1.3 lakh tonne aluminium smelter. Alcan also proposes the expansion of this smelter by another 1.5 lakh tonnes.

In late July, Pechiney laid the foundation for a joint venture with a China-based company, Lanzhou Aluminium, for the setting up of a 2.6 lakh tonne aluminium smelter in China, based on the pre-feasibility study to be completed by 2003.

Aluminium majors are also working in this direction with major technology initiatives, such as the Pechiney AP50 smelting system that may be commercially operational in the next few years, and Alcoa's `inert anode' breakthrough technology that is at an advanced experimental stage.

Similarly, as the need to set up greenfield capacities at a competitive cost and at significantly lower energy costs become imperative, it is likely that `super smelters' with capacities up to 5 lakh tonnes capable of producing at lower cost per unit of output will become an industry norm.

Though the automobile segment is likely to continue as one of the biggest users of aluminium in the next five years, the need to scout for new end-user segments has become paramount.

Unless the integrated and standalone downstream producers create these segments, the long-term sustainability of the industry may be called into question.

For an industry excessively focussed on the auto and can segments, the biggest challenge will be the creation of new end-user segments.

Although the auto industry will continue to be one of the biggest users of aluminium over the next five years, unless the majors create alternative end-uses the industry may have to foreclose on its opportunities for long-term growth.

The other big challenge will be the ability of downstream players to engineer/customise solutions according to customer requirements.

Addressing the International Aluminium Forum in May 2001, Mr Richard Evans, Executive Vice-President, Alcan Inc, raised the interesting question of whether upstream and downstream aluminium were fundamentally different lines of businesses.

He felt that the success factors for these two segments were different and added that successful players in upstream aluminium were from the mining and energy fields, while in downstream aluminium, the success factors depended on customer needs and a combination of lead times, prices, product attributes and customer perceptions. As the industry matures further, it is likely that upstream players will be dictated by business volumes, while successful downstream players will be the ones which can engineer/customise solutions to customer requirements.

THE international price trends in copper and aluminium are correlated to a large extent, moving up and down together. However, a closer examination of price trends reveals that copper prices are more volatile than aluminium's. This is also evident from the price trends of copper vis-à-vis aluminium. Over the past year or so, copper has exhibited two major price swings. After being relatively subdued in the $1,375-1,500 per tonne range between August and December 2001, the copper prices marched up to $1605 in March 2002 and again touched $1647 in June 2002. Unlike copper, the aluminium prices have remained locked in a narrow band between $1280 and $1425 over the past year.

At present, copper and aluminium are witnessing softening price trends. In late-July/early-August, the copper prices slipped below the $1,500-per-tonne mark (just as aluminium slipped below $1,300) at the London Metal Exchange (LME). The turmoil in the financial markets in the US and poor economic data percolating from the US and Europe have taken a toll on non-ferrous metal prices and it appears that this bearishness may continue for some time to come.

Probably, the only window of opportunity for the industry is the relatively strong growth in Asia which is keeping the demand alive for copper to some extent. However, the apprehension among industry players is that the LME inventory is rising again and that may result in a prolonged spell of depressed prices. A certain amount of buoyancy witnessed in copper in 2001 and early 2002 was attributable to a concerted round of smelter closures, production cutbacks/curtailments and de-stocking in the last couple of years. But that cushion of comfort appears to be fading.

To top it all, the pace of consolidation witnessed in the copper industry in 1999-2000 has since slowed down. In mid-1999, US-based Phelps Dodge (the second largest producer of copper then) attempted a significant consolidation by announcing a merger with two copper majors — Asarco and Cyprus Amax. But that deal achieved its objective only in a limited way. Phelps Dodge succeeded in acquiring only Cyprus Amax (then the sixth largest copper producer in the world). While Asarco (the then third largest producer) was acquired by Grupo Mexico. This acquisition helped Grupo Mexico become the second largest player in copper. Given the slack demand from end-user segments and soft/volatile price trends, the only way out for the top four copper majors such as Codelco, Grupo Mexico, Phelps Dodge and Noranda are to probably engage in another round of consolidation. This may at least create the scope for greater price stability in copper prices in the long run.

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