Commodities and Derivatives: A metal too common for its own good

ALUMINIUM is a funny metal. Eight per cent of the world's crust is made of it - more than any element except oxygen and silicon.

Yet it was only identified in 1809 and was launched as an expensive and exotic material at the Paris exposition in 1855.

It was not until the 1880s that it came into commercial production - that was when electricity became cheap enough to use electrolysis to separate the metal from its ore.

Since then, of course, aluminium has found its way into almost every manufactured item.

Its lightness makes it a popular component of many products where weight is important - indeed, Volkswagen is about to launch an all-aluminium Audi, the A8, which will be 140 kilogrammes lighter than a comparable steel bodied model, giving it improved performance and better fuel consumption as well as greater driver protection.

As a result aluminium overtook copper in the Sixties as the most used non-ferrous metal. Great energy-guzzling plants were built all over the world to produce it.

But it is only in the past few years that the world's commonest metal has become rather too common for producer tastes. In the three years to the end of 1993 stocks rose from six weeks' consumption to 15 and the price fell from dollars 2,000 to dollars 1,100 a tonne.

If you were a Western producer you blamed the Russians, who have increased their exports to the West from 290,000 tonnes in 1989 to between 1.5 and 1.7 million last year, according to an RTZ estimate. The problem was not rising production, but a fall in domestic consumption.

If you were a Russian, on the other hand, you blamed the West for failing to cut its own output in the face of the recession.

Until last month cutbacks were piecemeal. The biggest was announced last June, when Alcoa said it would cut US production by 268,000 tonnes. Analysts were not impressed - they said stocks would continue to rise.

In the new year, though, it became clear that multilateral talks on cutting production were about to bear fruit. In a remarkable piece of bullet-biting the EU, the US, Canada, Norway, Australia and Russia agreed to cut production by 10 per cent, or at least 1.5 million tonnes.

The aluminium price leapt by 14 per cent as a flood of cut announcements appeared. Alcoa would cut by 100,000 tonnes, Alcan by 156,000, Norsk Hydro by 70,000. Most remarkably, Russia said its producers would cut by 500,000 tonnes.

The industry is now waiting anxiously to see if those all-important Russian cuts are forthcoming. 'The smelters have gained more independence,' says Angus MacMillan, analyst for Billiton-Enthoven Metals in London. 'They are raising questions about whether they will cut back.'

His concern is backed by a report that the Bratsk smelter in Siberia, which can produce 850,000 tonnes a year, is refusing to cut output. 'It employs 20,000 workers,' an industry official said. 'If it stops, there will be serious social unrest and the directors will never agree.'

Attempts from Moscow to raise the Bratsk plant on the telephone and check the story were fruitless, underlying the increasingly tenuous hold the centre has on the outlying regions. Analysts believe it likely that Bratsk is holding firm. Russian factory managers may now be exposed to the free market, but few of them yet consider profit maximisation a priority.

Nevertheless, most analysts believe the agreement will bring some stability to the market. 'Prices have bottomed out,' Mr MacMillan says. 'But the dollars 64,000 question is not how much the Russians produce, but how much they export.'

Philip Crowson, RTZ's economic adviser, believes the worst of the Russian-induced pain is over for Western producers. As the CIS republics become more sensitive to market forces, he expects the flood of exports westwards to die back.

'They will redirect their domestic production towards less metal- intensive sectors,' he says. Future shocks will tend to knock out production, rather than divert it abroad.

'Existing Western producers have probably been more deeply affected in the past three years by the integration of the CIS into the world economy than they will be in the coming decade,' he says.

(Photograph omitted)