Slide 1
Good afternoon: I am honored and pleased to participate in this distinguished forum, to share some views on the global aluminum industry, and to learn more about the incredibly dynamic Chinese aluminum industry. So I’d like to thank our hosts, the China Nonferrous Metals Industry Association, for their kind invitation — and for the hospitality we have been shown.
Officially, I was invited to speak here as a representative of the Aluminum Association. However, in his remarks at the opening session, Craig Eddy, incoming chairman of our Association, already has raised some of the key issues and challenges from the American industry’s point of view.
At any rate, because those bilateral matters already have been brought to your attention, I would like to take a look at some current industry issues from a broader, global perspective. China is now a powerful presence on the world aluminum scene. So I’d like to reflect back on some of the enormous changes our industry has undergone over the past couple of decades — particularly in America — and see if there are lessons we might learn that would be useful going forward. Among the areas I intend to touch on are the historical global capacity situation, the crucial issue of sustainability, and some of the key markets we need to jointly develop.
Slide 2
Alcan overview and update
To help you understand my comments and background, it is probably wise to begin with a brief overview and update on my own Company. Today’s Alcan is a global leader in aluminum and specialty packaging, with 2002 revenues of US$12.3 billion. Alcan is the third-largest producer of primary aluminum in the world as well as the number 1 global producer and marketer of rolled aluminum products. As I am sure most people here know Alcan also is in the process of completing a tender offer for Pechiney that will solidify its position as one of the world's largest players in our chosen areas of activity.
Slide 3
As you can see from this slide, Alcan already has a very diversified and well-balanced business mix: Rolled Products, accounted for 42 percent or some US$5.3 billion of the Company’s overall revenues last year. Here in Asia, the Rolled Products group currently employs some 1600 people — mainly in Korea and Malaysia — and last year generated revenues of US$800 million. And overall, Alcan generated nearly US$2 billion in Asia. Our main markets in Asia include precision sheet for beverage can makers and re-roll for the light-gauge market as well as a variety of industrial-product applications and packaging.
Slide 4
Over the course of 2003, we will have supplied well in excess of 100 metric tonnes of rolled products to China — the vast majority of it sourced from our state-of-the-art Alcan Taihan Aluminum, or “ATA”, rolling operations in Korea. That represents roughly 30 percent of all China’s imports of rolled products and makes Alcan one of the largest suppliers of such products — domestic or foreign. Of course we buy a great deal of primary aluminum in China and would like to buy even more recycled metal. So our ATA unit contributes to a complementary two-way trade in aluminum and aluminum products that we think represents a unique opportunity for a long-lasting strategic partnership.
Slide 5
I should note, too, that Alcan has long been regarded as the most global of aluminum producers. We’ve been doing business around the world for almost a century and currently have a presence in 40 countries. Our ties here in China date back to the late 1920s. Alcan’s current interests in China include Nonfemet International Aluminium Co. Ltd., an integrated extrusion and fabrication plant in Shenzhen. It is a joint venture with former China National Non-ferrous Metals Industry Corporation and a Japanese partner and is focused on building materials. Alcan also operate four packaging plants in this country and an aluminum-composite panel plant in Shanghai.
Slide 6
A few weeks ago, we took another big step with the announcement of a joint venture with the Qingtonxia Aluminum Company and Ningxia Electric Power and Investment Company, that will give Alcan 50 percent ownership of a modern, 135-kilotonne pre-bake smelter located in the Ningxia Autonomous region. We have submitted a joint-venture proposal to the Government of the People’s Republic of China for approval and are optimistic about the outcome.
Slide 7
So in addition to our roles as a fabricator and an important supplier of rolled products, we hope to soon become a direct participant in this country’s burgeoning primary aluminum industry. I’m sure that, in the future, there will plenty of attractive opportunities in other areas as well.
Right here in China, we can see examples of other leading-edge Alcan technologies that are providing innovative solutions for the changing needs of the 21st Century customer. I am thinking, for example, of the Alucor composite panels that architects used to give the soaring roof of Shanghai’s spectacular new opera house the look of a “perfect curve”. Or the lightweight structures conceived by Alcan Mass Transportation Systems that have been utilized in the carriages of the “Transrapid” magnetic-levitation project (also in Shanghai).
As you know, the outlook for continued doubled-digit growth of the Chinese economy — and the Chinese aluminum industry — is creating lots of interesting opportunities for domestic and foreign participants alike. And I don’t think it would come as a great surprise if I were to say that, going forward, we see creating strategic alliances with Chinese partners as a key for the future of the whole industry.
Slide 8
Now let me move from an optimistic picture of collaborative growth to some lessons learned from our recent global experience. I would urge all industry players — my own company included — to be mindful of the potential pitfalls that can easily be overlooked in an environment where the upward arc of the demand curve seems to defy gravity. Let’s examine the historical global capacity experience — and what lessons might be learned.
Slide 9
Let’s begin by taking a quick glance at some of the influences that have combined to reshape the aluminum business over the past decade — and which set the stage for the current wave of industry consolidation.
These influences have included:
- A long-term decline in the real price of aluminum and eroding margins;
- Pressures to improve return on investment;
- Maturing of terminal markets such as the London Metals Exchange (LME);
- Technological changes — particularly on the upstream side;
- Intense competition from other materials such as steel and plastics; and, last, but not least, the
- Need to respond to the changing demands of global customers, such as automakers and can manufacturers.
Slide 10
Although China is subject to many of the same pressures facing aluminum producers in other regions of the world — including high costs for energy inputs and raw materials such as alumina — those negative factors are largely offset by strong economic growth and a big increase in industrial output. With primary aluminum consumption forecast to continue growing at a rate of between 10 and 12 percent over the next few years, China’s current experience is reminiscent of what is fondly remembered as the “golden era” of the U.S. aluminum industry following World War II. Between 1946 and 1973, industry shipments in the United States grew at a compound annual rate of 8.5 percent. That’s a very impressive performance for such a basic industry — particularly when you consider that it continued for almost 30 years straight.
Slide 11
However, that happy era came to an end, in the U.S. and elsewhere, with the so-called OPEC crisis. The tremendous escalation in energy costs that followed events of 1973 in the Middle East couldn‘t help but hit hard at an industry that, essentially, involves the conversion of electrical energy into a usable and stable material — an “energy bank”, as some have described it. We also experienced a significant increase in publicly-owned or sponsored smelting capacity in various regions of the world — capacity that tended to be less sensitive, in the short term, to the disciplines of the marketplace and the pressures for return on investment.
I don’t mean to imply, however, that 1973 marked the abrupt end of good times for the U.S. industry as a whole. In fact, the downstream end of the business had yet to reach full speed — more about that in a minute or two. The OPEC crisis was only the first of three major shocks that rocked the global industry during the latter decades of the 20th century. The second major shock was the inception in late 1978 of commodity trading in aluminum ingot on the London Metal Exchange. This sparked the beginning of “disintermediation” or the breaking apart, of the supply chain, triggering a shift from producer pricing to terminal-market pricing. That led, in turn, to effective economic separation of upstream primary operations from downstream fabricating activities – a reality that has been evolving and maturing since.
Slide 12
And that leads me to examine the recent experience of the U.S. rolled-products sector, which during the 1980s enjoyed a period of rapid growth that — for a time, at least — rivaled the golden era of the postwar years.
Let’s focus in on can stock, which represents the largest segment of flat-rolled sheet in North America and also happens to be a market that I am very familiar with. During the period from the mid-1970s to 1990, can capacity expanded at a pace in excess of 10 percent compounded annual growth rate. With cans grabbing market share from glass bottles, we saw no end to market growth. The industry responded with heavy investment by all major aluminum companies in hot-mill-based assets to supply can sheet. At the same time, there was steady growth in low-cost, continuous-casting capacity for non-can products.
Slide 13
Everyone was eager to capture a bigger piece of a fast-growing market. But the good times did not last. During the period from 1990 to 2001, can growth in North America slowed and then stopped altogether — thanks in large part to the growth of PET in the soft-drink sector. The slowdown sparked a period of industry consolidation that saw Alcan and Alcoa emerge as major suppliers, with a competitive edge in terms of technology and productivity. Other suppliers were forced into a “second-tier position”, competing with each other and with continuous-cast producers for lower value-added, non-can products.
Down gauging of sheet thickness had a further negative impact on producer’s financial performance, while requiring additional investments in new technology. This prompted further consolidation among suppliers, along with several mill closures and idled capacity. Meanwhile, PET — the 20-ounce plastic bottle, in particular — has continued to erode aluminum’s market share. Alternative packaging such as juice boxes has also captured share, especially in new beverage products, and glass bottles have enjoyed somewhat of a rebound in the beer sector.
Now, the annual growth rate for aluminum cans in North America is expected to be slightly negative throughout the forecast period. And as you can see here
Slide 14
we now have a big excess of flat-rolled capacity in North America. Rolling mills continue to increase their output capabilities every year and in spite of the closures and bankruptcies, we still have approximately 1.5 million tons of excess capacity.
Slide 15
To make matters worse, steady growth in low-cost, continuous-casting capacity for non-can products has been adding to the over-supply situation in rolled products — and not just in North America.
As you can see here, the addition of continuous-casting capacity on a global scale has been exponential, registering a compounded annual growth rate of 15 percent from 1958 through to 2000. Continuous-casting technology is currently applicable to half of the global rolled-products market, mainly in low-margin segments. However, as the technology improves, continuous casting will become applicable to a greater fraction of the market. So this is not likely to be a short-term phenomenon.
Slide 16
I think the lessons to be learned from the U.S. experience of the 1990s are that: (a) growth cannot go on forever; (b) growth markets of the sort we experienced leading up to the ’90s often mask poor investment decisions and encourage wishful strategic thinking; and (c) further adjustments of capacity to meet demand are inevitable.
Slide 17
Slide 18
Returning now to the broader global scene, I spoke earlier of three major shocks that rocked our industry in recent decades, including the OPEC crisis and the start of trading in aluminum ingot on the LME. The third of these was the so-called Russian Metal Shock that hit in the early 1990s, following the breakup of the former USSR. During 1992-93, Russian exports to the West grew so rapidly and so large that they were blamed for a glut of the metal on world markets and a price collapse. Thankfully, our industry managed to absorb that shock and Russia today ranks as the second largest primary aluminum producer in the world as well as an integral part of the overall global supply chain.
Slide 19
Now, however, there are fears in some industry circles that China could cause a fourth shock, should its domestic demand for aluminum stop growing. Primary production in this country has been expanding at a blistering pace — a 25 percent compound annual growth rate over the past couple of years. And there is an understandable desire to become more self-sufficient in rolling capabilities as well.
So are we likely to see a fourth shock wave? Opinions differ among various analysts and industry members. We do know that, on the primary-metal side, the Government of the People’s Republic has adopted a policy to shut down small-scale, high-cost and polluting Söderberg smelters by 2007. Full compliance with this policy would result in the elimination of about 900kt of Söderberg production and ease fears about vital environmental concerns. On this point, Alcan is very encouraged by the initiatives taken by the Chinese authorities to reinforce this policy. –In a recently updated study by Alcan’s own global market-analysis and forecasting unit.entitled China’s Aluminum Industry: Setting the Record Straight, we conclude that, although this country became a significant net exporter of aluminum for the first time in 2002 — a trend we expect may continue over the next couple of years — China should revert to a balanced position by the mid-decade. So in our opinion, we are not likely to see another Russian-metal-shock type of situation with primary metal. Rather than becoming a destabilizing influence, we see China emerging as a dynamic and valued member of the global aluminum industry.
Slide 20
The other area I wish to touch on today echoes some of Mr. Eddy’s comments in the opening address and may prove even more crucial to the long-term well being of our global industry —sustainability.
Slide 21
Sustainability touches many aspects of our business…environmental, economic and social. Companies throughout the aluminum industry have undertaken a range of initiatives aimed at reducing environmental impact, energy requirements, water usage etc. All of these efforts are important for our future.
To illustrate what I mean, I will again turn to the example I know best — Alcan. Our Company, like most others, operates in a manner essentially intended to optimize financial returns. But we know that ensuring best practices in environment, health and safety and increasing the social and economic benefits of our activities are also very important in terms of protecting our “license” from society to operate and grow. So we have worked hard over the years to earn our reputation as a company that is strongly committed to environmental performance and social responsibility known for "doing the right thing".
But Alcan is not alone in this effort. We are part of a North American aluminum industry that has a clear vision of the sort of challenges that lie ahead — and of how to meet them. By 2020, our industry aims to be recognized as a world leader in providing innovative, material-based solutions that are environmentally sustainable and deliver superior value to users.
Slide 22
Key goals of the North American aluminum-industry vision include:
- Cutting smelting energy use by approximately 25 percent;
- Achieving additional energy-savings targets identified by industry
- roadmaps;
- Producing zero net emissions of greenhouse gases on a lifecycle basis;
- Increasing the efficiency of primary aluminum production and secondary recycling processes; and
- Improving the health, safety, and environmental conditions associated with all production operations.
Slide 23
On the issue of climate change, the aluminum industry is ahead of the curve as mentioned by Mr. Eddy in his opening remarks. In 1995, our industry signed on with the U.S. Environmental Protection Agency in the Voluntary Aluminum Industrial Partnership. Twelve of the 13 primary aluminum producers operating in the United States at that time — including Alcan, Alcoa, Century, and others — committed to substantially reducing emissions of perfluorocarbons or PFCs, a potent greenhouse gas. By 2000, in only five years, the participants reached their goal of reducing these emissions by the equivalent of 2.2 million metric tons annually. This achievement earned them the agency’s Climate Change Protection Award — and recognition from President Bush as a role model for other industries.
This partnership has been extended through 2005, and our industry is looking forward to building on the success of the first phase of this program.
I referred earlier to efforts aimed at alleviating environmental issues related to Söderberg smelters here in China. In Canada, Alcan researchers have developed a revolutionary new low-tar pitch that produced a 47 percent reduction in polycyclic aromatic hydrocarbon (PAH) emissions at our remaining Söderberg smelters in Quebec. Perhaps our expertise in this area could be put to good use here.
Slide 24
I am aware that here in China people are very good at recycling — which is vitally important in the context of the aluminum industry and sustainability. Recycling not only produces a strategic supply of metal, but also results in significant environmental benefits. As you probably know, recycling new metal from aluminum scrap requires 95 percent less energy than is needed to produce primary aluminum — which means that up to 95 percent of related emissions (such as greenhouse gases) are also avoided. This is another area where the experience of our industry in North America — where the beverage can has been widely used for decades — might prove helpful. Recycled metal is a key element of the North American aluminum industry’s current and future survival.
Slide 25
My point is that there are a large number of industry-wide sustainability issues that we ought to be working on together — and we should do it sooner rather than later. As a global industry, we must strive to bring economic, environmental, and social benefits to society, to the people. In particular, we’ve got to reduce or eliminate damaging impacts on the environment, make better use of natural resources and provide a safe work place. We also must address industry issues such as red-mud disposal and spent-potlining treatment.
Slide 26
Promoting our metal
I believe, as well, that the global aluminum industry must band together to showcase and promote the superior attributes of the material we produce. Aluminum is modern, it’s flexible, it’s environmentally friendly and it’s innovative! So let’s tell the world about it — and not leave the stage to competing materials.
A good example — and one that is very timely, given the rapid growth of China’s motor vehicle industry these days — is the “light-weighting” of automobiles. For instance, beneath the skin of Jaguar’s sleek new XJ luxury sedan is a unique aluminum structure made possible by Alcan technology. It is 40 percent lighter than an equivalent steel body and 60 percent stiffer than the previous XJ. All of the cars "hang-on" body parts — hoods, doors, fenders and trunk lids — are produced of aluminum as well, further contributing to weight reduction, increased fuel efficiency and improved performance. All of us must work to harness the benefits of aluminum for the application in the Chinese automotive industry.
Another important global market segment we ought to be working together to promote in China is the aluminum beverage can. The can market in Asia is currently expanding at around 2 percent per year. But I’m sure that, by working together, we could increase that growth rate at the expense of competing materials like glass and PET. The recycling benefits of our material are vastly superior in this arena.
Slide 27
Concluding remarks
In conclusion, I wish to emphasize that, notwithstanding the many challenges which lie ahead — including the inevitable industry “growing pains” here in China — ours is a business with a bright future. However, it’s up to us all to work together to make good things happen, particularly in light of fierce competition from competing materials. Just to recap then, lets commit ourselves to:
- Seeking innovative new applications for aluminum and aluminum products, including key global markets like cars and cans;
- Exerting global leadership in the area of sustainability; while
Remembering the lessons to be. However, I’m sure I speak for other members of the Aluminum Association when I say that we look forward to collaborating with our Chinese colleagues to promote the global industry.
Thank you very much.
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