Aluminum's Makers Exult

Prices have doubled, and the industry operates at full blast

Aluminum, one of the lightest and most malleable of metals, traditionally has been a cyclical business. But today its producers, almost alone among metal manufacturers, are exulting over prosperous stability. Makers of steel, zinc, nickel and copper are ailing because of surging costs and rising cheap imports, but the aluminum industry cannot keep up with demand.

Since 1973 the price of aluminum has jumped from 25-c- per Ib. to 53-c-. The gap between supply and demand, some industry leaders assert, will drive the price considerably higher, at least to 60-c- by the early 1980s. Earnings of the big four, Alcoa, Alcan, Reynolds and Kaiser, which control nearly three-quarters of the U.S. market, have climbed sharply. With considerable understatement, W.H. Krome George, chief executive of Alcoa, says, "For once in our life we have been fairly lucky. Things are rolling along pretty good.''

Luck actually has very little to do with the industry's cozy stance. Until 1975 the biggest producers acted as if it was more important to expand capacity than to make money. Even though the Government stood ready to buy aluminum for its strategic stockpile, an excess supply overhung the market, depressing prices. As Duncan Campbell, vice president of Montreal-based Alcan, which sells more than a quarter of its production in the U.S., puts it, "We went through our garden of Gethsemane in most of the 1970s basically because of oversupply. We were gouging each other's eyes out." A costly lesson was learned.

Two events in 1975 set the aluminum executives on a new course, which has been better for the industry but more inflationary for the economy. The strategic stockpile, used by the Government to discipline the industry's efforts to increase prices, was virtually depleted. More important, the race to add new capacity was halted. The reason: it now costs $2,000 per ton (double the figure of five years ago) to build a new plant, according to Cornell Maier, president of Kaiser. That considerable figure does not include the costs of developing sources of bauxite, the reddish, earthy raw material, or of electricity, which is used to transform the ore by a reduction process into metal. Even though the industry is operating at full capacity, its rate of return on investment falls short of the target of at least 10%. Says Maier: "We need considerably higher prices to justify new investment."

By suppressing the urge to expand, aluminum producers are now ensconced comfortably in a sellers' market. Capital expenditures are aimed mainly at such things as moneysaving computer controls and materials-handling equipment and the reduction of energy costs. In addition, the big companies are eagerly spending to install machinery that transforms metal into fabricated products such as aluminum cans, electric cable, auto components and building materials. Adding value to ingots increases profits.

These efforts, plus small additions to existing facilities, will increase world capacity by less than 4% a year, while most experts agree that the market will grow at a rate of 5% for the foreseeable future. Only one firm, Alumax, a joint venture of AMAX, the large U.S. mining company. Japan's Mitsui & Co. and Nippon Steel Corp., is attempting to cash in on the shortage by investing in new plants in Oregon and South Carolina--a mighty $800 million gamble.

Lack of a comprehensive energy policy makes the aluminum companies nervous about committing huge sums for new facilities; they cannot be sure that fuel will be available to produce the electricity consumed in gigantic quantities by aluminum smelters. On top of that, the endless rounds of litigation by conservationists delay the construction of new power plants, thus directly affecting plans for new aluminum smelters. A possible result: a shortfall in U.S. production in the early 1980s, which would add to the nation's trade deficit because fabricators would be forced to import more and more aluminum. Says one exasperated industry leader: "Looking at the way they handle the power situation in this country, it sort of makes you think about places like the Amazon, where they don't' have quite the same bunch of clowns." The aluminum producers are indeed looking to Brazil and Australia, which have plentiful supplies of cheap power and bauxite, as places to expand production in the years ahead.

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