Aluminum Faces Trouble On Road to Bright Future

WHAT do tough new rules on auto pollution in California and the collapse of the former Soviet Union have in common?

Supply and demand in the aluminum business. It seems to be a textbook case of how seemingly unrelated events come together to make the price of an everyday commodity rise or fall.

In this case it's a swan dive. Aluminum at $1325 a ton on the London Metal Exchange is about $100 below its all-time low price (adjusted for inflation). One reason is that the aluminum smelters of the former Soviet Union are shipping raw aluminum ingots to the West, driving down the price.

"There are very large deliveries of aluminum [from former Soviet republics] into Rotterdam," says James Crombie, an analyst with Yorkton Securities in London. "Because their domestic economy has collapsed ... they have raw aluminum available for export."

The West imported 885,000 tons of aluminum from former Eastern-bloc countries in 1991; that is up from 386,000 tons in 1990. Those figures aren't exact because "no one really knows," says an industry source.

That has put pressure on aluminum producers in Western countries. Alcan Aluminium Limited of Montreal, one of the world's largest aluminum producers, lost $36 million in 1991 after earning $530 million in 1990.

But the Soviet supply may not last.

"There are reports of a shortage of alumina," says Mr. Crombie. Alumina is the intermediate stage in the smelting of aluminum. First bauxite is made into alumina, then smelted into aluminum. The more efficient hydroelectric-powered Russian smelters have to get alumina shipped 1,600 miles from the Black Sea to Siberia.

The good news for the aluminum industry is in cars. That is where state rules on fleet fuel consumption come in. One sure way to improve gas mileage is to lower a car's weight. The Aluminum Association in the United States estimates that if aluminum replaced steel on most parts in cars, an average mid-sized sedan would contain 1,000 pounds of aluminum. That car would be 25 percent lighter, with about a 20 percent gain in fuel economy.

Aluminum is roughly half the weight of steel. Though industry experts say they have to use more of it to equal the strength of steel, it is still lighter overall.

"We will increase our use of aluminum," says John Ochs, of Ford Motor Company in Detroit. "Lighter cars mean better fuel economy.... Because of CAFE [Federal Combined Average Fuel Economy regulations] cars will have to become lighter."

But the average North American sedan will not get the aluminum treatment first. It is already happening in luxury imports. The British Jaguar XJ-220, a limited production all aluminum car, costs more than $500,000.

"The use of aluminum can cut down the weight of the body by up to 40 percent," says Val Brown of Audi America in Detroit.

Audi has built experimental aluminum cars such as the Quattro Spyder, an aluminum-bodied sports car.

The Accura NSX is a production sports car (you can walk into a showroom and buy one) that uses about 900 pounds of aluminum throughout.

"If there's to be 1,000 pounds of aluminum in the average family sedan, it gives you an idea of the size of the potential market," says Alcan's Michael Miller.

Analyst Crombie thinks aluminum use will grow by 2 to 3 percent a year until the year 2000. Though aluminum will be increasingly used in industrial countries, more and more of it will be produced in developing countries because of the energy needed to smelt it.

Countries with cheap electricity, such as Canada and Russia, are already leading aluminum producers. But oil and gas can produce cheap power as well.

"Venezuela, Saudi Arabia, and Iran will become large aluminum producers because they have low energy costs," says Crombie. "Canada will keep its advantageous position [as an aluminum producer] because of cheap hydroelectricity."