2003 Nonferrous Scrap Supplement - Return to Stability

It is a truism that uncertainty is not good for investment or business. And uncertainty over the near-term outlook of the world economy continues amid the unsettled climate in the Middle East.

As manufacturers, aluminum producers’ fortunes are tied to the larger economic picture. In this context, the tough times our industry has faced in the past two years is unsurprising.

Nonetheless, I remain optimistic that stability will return to the financial markets, and to the consumer and industrial markets our industry serves. When that occurs, it is essential that the aluminum industry be prepared to compete aggressively and effectively for its rightful share in these markets.

To do that, the aluminum industry must think deeply about how it might reposition itself. Personally, I believe we must take advantage of the growing worldwide interest in sustainable development to compete more effectively in a challenging new marketplace. But more on that later. First, what is the state of the aluminum industry?

GLOBAL PICTURE. An analysis of our industry’s global performance in 2002 shows a modest rebound over year-earlier results.

In 2002, total consumption for both primary and secondary aluminum increased an estimated 2.8 percent in our survey countries, excluding China, Russia and other nations from the former Eastern Bloc. These excluded countries are experiencing substantial growth in aluminum: 17 percent for China and about 10 percent for Russia.

Although 2.8 percent is below the industry’s long-term growth rate of 3.5 percent, it nevertheless represents a turnaround from 2001, when total aluminum consumption dropped some 6 percent.

Industry data from the first few months of this year suggests the potential for a continuing upturn in industry activity. The Aluminum Association’s new order index in February YTD measured 96.49, up 1.4 percent over the same period in 2002.

A survey of the broad economic indicators for the U.S. also suggests the potential for a modest uptick in activity for 2003 over 2002.

Gross domestic product (GDP) is expected to grow by 2.6 percent this year. While not approaching the GDP growth rates of the late 1990s, this is nonetheless higher than the 2.4 percent growth registered last year.

Industrial production is projected to grow by almost 2.2 percent this year after slumping by minus 1.1 percent last year. Bad as that was, it would have been considerably worse had not the auto industry been so aggressive in pushing domestic car sales.

U.S. builders are expected to start 1.67 million housing units this year. This is strong by most any standard except for the 1.7 million houses started in 2002.

What does this imply for our major markets in 2003?

MAJOR MARKETS FOR ALUMINUM. The extent to which consumer and business spending is being stifled by geopolitical uncertainties versus other secular factors is anyone’s guess.

Assuming that we see a reasonable resumption of growth in North America in the months following hostilities in the Middle East—and if we cautiously extrapolate deeper into this year—here is what we might expect going forward.

The prospects for aluminum increasing its share within these key markets over the short term are mixed. Within housing, for instance, vinyl siding and composite material are currently gaining at the expense of aluminum.

In the lightweight vehicle market this year, we can expect to see about 16.4 million unit sales, according to Global Insight’s March report. That number is slightly below last year’s level and I suspect may even be somewhat optimistic given the recent news out of Detroit. The better news in this sector is the growing use of aluminum in the North American transportation industry. On average, since 1990 aluminum’s use in cars has doubled while its use in light trucks has tripled. The average car now uses about 273 pounds of aluminum and the percentage continues to grow.

Turning to can sheet sales, we find a different situation: growth is stagnant and competition from plastic is fierce for what growth that does exist.

A VISION FOR OUR INDUSTRY. If my attitude toward our industry’s outlook can be categorized as "glass-half-full," I would quickly add that I don’t see our industry achieving its full potential without a vision and the commitment to translate that vision into action.

Establishing that vision and action plan, we must first recognize our fundamental challenge: Ours is a slow-growing, mature manufacturing industry that must adapt to and compete in a highly innovative, fast-paced global marketplace in which:

• Competition from other materials is keen.

• Traditional markets are under pressure.

• The need to adapt to new consumer applications and appeal to a kaleidoscope of changing tastes and preferences is constant. All of which prompts some serious questions:

• How do we prosper in this environment?

• How do we attract investment?

• How do we grow market share and fend off the challenge from competing materials?

Aluminum is the highest-value recovered material offering by far the greatest revenue stream of all recovered materials. In fact, were it not for the recycled beverage can, recycling would probably cease because it would no longer be remotely economic. Recycling one ton of aluminum cans yields approximately $1,150 of revenue—while recycling a ton of steel, glass, plastics or paper comes nowhere close to covering the average collection cost of about $200 per ton. Recycling is integral to our industry’s operation and its identity. No material has an identity so closely allied with a socially and environmentally beneficial attribute like recycling as does aluminum.

And yet the value of this identity may recede absent our industry’s renewed efforts to strengthen it. Aluminum can recycling rates have fallen from their all-time highs of several years ago and—while still far above the recovery rates for plastic and glass—the gap is closing.

The aluminum industry well knows that our metal is infinitely recyclable and that its value is such that it effectively subsidizes the collection of other materials in the waste stream. But research demonstrates that the public hasn’t a clue about this information. If the public is unaware of these attributes and/or does not attach importance to them, then the likelihood that they will purchase an aluminum product at least in part for its sustainable qualities is negligible.

If aluminum is to become favored as a truly sustainable resource, then the recycling attribute is likely to be the basis for that conviction. It provides us with that rarest of advantages: The opening to make a credible case about the benefits of using aluminum for the benefit of current and future generations.

For example: What if consumers knew that the 54 billion cans recycled in 2002 constituted a $750 million value? Or that recycling those cans saved energy equivalent to 15 million barrels of crude oil? Think of the relevance that such energy savings has to the sustainability issue.

Think of the impression on auto engineers, dealers, and buyers if we can raise awareness that every ton of aluminum replacing two tons of steel in automobiles reduces carbon dioxide emissions by up to 20 tons over the life of a vehicle. Or that aluminum offers substantial opportunity to reduce greenhouse gas emissions in the auto fleet.

Beyond its value to the environment and consumers, recycling is also good for our business. Scrap is 32 percent of total metal consumption. It would take 23 smelters the size of a modern-day 400,000-ton smelter to equal our industry’s consumption of aluminum scrap. That amounts to a $30 to $40 billion investment, not including the corresponding costs of bauxite and alumina facilities.

After all is said and done, recycling is an appeal to intelligence, resourcefulness and good business sense,.and no better illustration of sustainability exists than recycling aluminum.

The task we have now as an industry is to tie it all together for consumers. Aluminum alone is infinitely recyclable, provides the highest value, and its recyclability promotes sustainable development through energy and environmental advantages. This is true for the aluminum can as it is for aluminum automobile parts, aluminum building materials, and aluminum consumer goods.

Let’s not forget that recycling ties our product to a value important to almost everybody—their communities. In short, it is our brand. But, we are in danger of losing our brand. This is something our industry cannot afford.

This would be especially regrettable now as the world begins to focus on sustainability. The linkage is incredibly strong with our products.

With this in mind, the Aluminum Association has launched an initiative to take our industry’s sustainability message to consumers, so that they can make a fully informed decision about the materials they purchase. An executive committee has formed for the express purpose of:

1. Turning recently completed consumer research into actionable recommendations;

2. Developing core messages we can use with maximum impact that will perhaps broaden our recycling message into a new communications platform for talking more comprehensively about a sustainable aluminum industry; and

3. Producing the marketing tools to carry this theme forward.

The Aluminum Association will report on the progress of these initiatives and the resulting recommendations formulated by the executive committee.

The intrinsic value of aluminum is the heart of our competitive advantage, and of how we provide sustainable development.

For the benefit of both our industry and the planet that we all inhabit, it is our obligation to bring aluminum’s sus-tainability message to the wider marketplace.