Aluminum Assignment
2. We predict in the next several years that the primary aluminum demand will increase, but at a slower rate that it has been historically. * We predict a temporary increase in aluminum pricing due to production restrictions imposed by CIS and US producers beginning in 1994. However, the price reduction will be temporary, as the LME warehouses have inventory at historic highs of 2.5 thousand tons of aluminum, which could be sold at any time. Furthermore, the US has agreed to temporarily idle production of 950 thousand tons of aluminum in an attempt to inflate prices. However, this is a short term solution, as production cannot be idled for a long period of time without severe damage to the aluminum production line. * The consumption of aluminum by the Western world has increased over the last 5 years, but at a much slower rate than in the past 10 years. Additionally, the secondary aluminum market has been increasing, and serves as competition for the primary aluminum market. By 1994, the secondary aluminum made up 25% of worldwide product and saw a 5 year CAGR of 3.7%, while the CAGR for primary aluminum had decreased to a rate of 1.4% worldwide. The startup cost for a secondary aluminum plant is far lower than that of a primary aluminum plant. The operational cost of the secondary aluminum plant is far lower than that of a primary aluminum plant, requiring about 5% of the energy needed to operate a primary aluminum plant. As a result, there will be an increased supply of aluminum in the market, due to secondary aluminum producers and high amounts of inventory at the LME warehouses, causing a decrease in prices of aluminum. With lower prices comes an increase in demand for a product. * By 1994, the highest usage of aluminum went to transportation, which made up 25% of worldwide demand. The growth area for transportation is for the construction of cars. The use of aluminum in cars production appears to be increasing substantially and car manufacturers are using increasingly more aluminum in their vehicles. Additionally, the second highest usage of aluminum went into building and construction, which we believe to be a growth area for as construction increases worldwide. * We believe that in general, the worldwide aluminum market is in a period of recovery, following the collapse of the former Soviet Union, and that demand at the beginning of 1994 has hit its low. We predict that worldwide demand, led by demand from the growing Chinese economy, and increased innovations in the transportation industry leading to more light weight and fuel efficient vehicles. However, the growth in demand will be slightly offset by competition from the secondary aluminum market and the loss of the CIS Military market. For these reasons we believe that demand will grow slowly over 5 years for the first 5 year period, but then rapidly increase over 10 years. * Historically, the demand for primary aluminum has been relatively stable, excluding certain periods of crisis – most recently the collapse of the former Soviet Union in the period from 1989 to 1993. To predict the future demand, we choose to discount the period from 1989 to1993 and base our analysis on the period 1983-1988, where the 5 year CAGR was at 5.89%. We predict that the growth in primary aluminum demand for the period 1994-1999 will be slightly less than the CAGR during 1983-1988, hence CAGR for 1994-1999 = 3.75% and the demand of primary aluminum in 1998 (assuming 1993 demand at 18800 thousand tons) = 22,600 thousand tons * We predict a higher increase in the demand for primary aluminum in the period 1998-2003, mainly driven by high growth sectors, for example, construction in Asia. Our prediction of CAGR for 1994-2003 = 4.00% and the demand of primary aluminum in 2003 (assuming 1993 demand at 18800 thousand tons) = 27,829 thousand tons

3. We forecast the price of primary aluminum will increase in the next 5 years due to increased demand.
Pricing for aluminum has historically remained steady with gradual increases year over year. The periods when aluminum has lost significant value have been during periods of crisis, like the oil crisis in 1974, the recession in the 1980s and the collapse of the Soviet Union during the early 1990s. In general, aluminum has been able to recover its price after the crisis period has passed. Though the current price is $1100 per ton, we believe that the aluminum industry is in a period of recovery, though a period of slower growth. Therefore, we believe that the price of aluminum will recover, albeit at a slower rate. In 5 years, we predict that the price of aluminum will be at $1500 per ton. We base this number upon the price of aluminum around 1987, towards the end of the period of growth in demand, and prior to the collapse of the former Soviet Union, which caused the price of aluminum to decline precipitously.