India has the fifth largest bauxite reserves with deposits of about 3 bn tonnes or 5% of world deposits. India’s share in world aluminium capacity rests at about 3%. The per capita consumption of aluminium in India continues to remain abysmally low at under 1 kg as against nearly 25-30 kgs in the US and Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China, which implies significant potential for the sector. The key consumer industries for aluminium in India are power, transportation, consumer durables, packaging and construction. Of this, power is the biggest consumer (about 44% of total) followed by infrastructure (17%) and transportation (about 10%-12%).

Key Positives

Growth potential:
The per capita aluminium consumption in India is less than 1 kg compared to about 3 kgs in China and 30 kgs in the US. The fact that almost 44% of the domestic aluminium is consumed by the electrical sector and there are only about 300 applications for the metal in India leaves a lot of room for the domestic sector to grow. Just to put things in perspective, aluminium usage on the global front is tilted towards transportation and packaging sectors and there are an estimated 3,000 applications for the metal.

The India advantage:
Indian aluminium companies are amongst the lowest cost producers of the metal in the world, which is a significant advantage, especially during times of cyclical downturns. Abundant bauxite reserves and access to cheap labour have given the domestic aluminium manufacturers an edge over their international peers.

Key Negatives

High dependence on power sector:
The electrical sector consumes a major chunk of the total cost of domestic aluminium production. But considering the sticky positions of the State Electricity Boards (SEBs) and uncertainties raised with respect to the smooth implementation of the Electricity Act 2003, the growth in the power sector is likely to be slow.

Waning tariff protection:
The consistent decline in import duties reduces the net tariff protection for aluminum producers making them vulnerable to cheap imports, which could be detrimental to their financial health, especially during times of cyclical downturns.

The China factor:
Strong demand for the metal from China and simultaneous improvement in economies like the US and other Asian economies led to the strength in global aluminium prices. However, the all time high aluminium prices have started witnessing pressure as the industry is expected to witness excess supply of 0.562 MT in 2007 as compared to 0.287 MT supply shortage in 2006. Chinese aluminium supply is exceeding demand growth. Surplus is being exported in the form of semis leading to surplus situation in the global aluminium markets, which will ultimately lead to softening of prices.

India is considered to be the fifth largest producer of Aluminium in the world. It accounts to around 5% of the total deposits and produces about 0.8 million tons of aluminium. It is estimated that if the country’s aluminium consumption rate maintains, it’d be having the reserves for over 350 years. Most of the bauxite mines lie in Bihar, Karnataka and Orissa.

In India, the production of aluminium is highly concentrated and is in the hands of the following four companies:

- Bharat Aluminium Co. Ltd (BALCO)

- National Aluminium Co. Ltd (NALCO)

- Hindustan Aluminium Co. Ltd (HINDALCO)

- Madras Aluminium Co. Ltd (MALCO)

BALCO and NALCO represent the public sector and HINDALCO and MALCO represent the private sector of the country. Earlier a company named INDAL was also indulged in the production of aluminium independently but in year 2000, it was taken over by HINDALCO and now it works as a subsidiary of the parent company.

Salient features of Indian Aluminium Industry

- Highly concentrated industry with only five primary plants in the country.

- Controlled by two private groups and one public sector unit.

- Bayer-Hall-Heroult technology used by all producers.

- Electricity, coal and furnace oil are primary energy inputs.

- All plants have their own captive power units for cheaper and un-interrupted power supply.

- Energy cost is 40% of manufacturing cost for metal and 30% for rolled products.

- Plants have set internal target of 1 – 2% reduction in specific energy consumption in the next 5 – 8 years.

- Energy management is a critical focus in all the plants.

- Two plants have declared formal energy policy.

- Each plant has an Energy Management Cell.

- Achievements in energy conservation are highlighted in the Annual Report of the company.

- Energy targets are based on best energy figures achieved in their sector / region and by the plant itself in the past.

- Generally, government policies were rated as conducive to energy management.

- ‘Task Force’ formed by BEE in this sector to work as catalyst in promoting energy efficiency.

- High cost of technology is the main barrier in achieving high energy efficiency.

Indian aluminium market

Indian market for aluminium has expanded since a few years and is directing towards further growth in coming years. Both public and the private sector are indulged in the production of alumina and aluminium. With the change in time, Indian aluminium sector has observed drastic changes. Earlier government played an important role in fixing the regulations in trading of aluminium as it had the monopoly in the production of the metal but currently it has lost its control over the price and distribution due to the emergence of private sector. Indian production figure for this metal is around 0.8 million tons in a year. That makes it the fifth largest producer of aluminium in the world. India has 5% of the total bauxite deposits in the world that can last for approximately 350 years with the present consumption rate. The consumption of this metal is also on a rising trend with a figure of around 0.618 million tons which is expected to touch 0.78 million tons mark in 2007.

In early 1990s when the Indian economy was liberalized, India identified its export potential and emerged out to be a net exporter of Aluminium. Till now it has been an exporter of this metal, though Indian scenario hasn’t been a self-dependent one. Indian exports figures hovers around 82000 tons annually and the major importer countries of Indian aluminium are:

i. Bangladesh
ii. Sri Lanka
iii. Egypt
iv. Iraq

Market influencing factors

- Domestic demand and supply.
- International prices.
- Interference of government and various associations.
- Import duties.
- Other economic activities in the world.
- Price fluctuations of the input materials like power, freight etc.
- Changes in inventory stocks at LME, SHFE and TOCOM warehouses.
- World aluminium mine production through exploration of new mines and expansion of existing mines.
- Economic growth of major consuming nations such as China, Japan, Germany etc.
- Growth and demand in the construction, packaging and transportation industry.

Aluminum to Beat Copper as Takeovers Squeeze Supply

Porters carry a sheet of aluminum

Aluminium, the worst performer on the London Metal Exchange since 2002, has the best chance to advance for at least the next six months. A growing number of investors say takeovers of Alcan Inc. of Canada and Russia’s OAO Sual Group may reduce aluminium production as China, the world’s largest supplier, cuts exports. Aluminium will be the only metal on the LME to gain for the rest of 2007, while copper, nickel, zinc and tin decline, futures markets show.

United Co. Rusal, the Russian aluminium company controlled by billionaire Oleg Deripaska, expects the metal to appreciate 50 percent to $4,000 a metric ton as early as next year. Prices will probably rise through 2010, say Deutsche Bank AG, UBS AG and JPMorgan Chase & Co., increasing profit for miners BHP Billiton Ltd. and Alcoa Inc. and hurting consumers, such as Boeing Co. and bottlers for Coca-Cola Co.

“Aluminium futures are the best place to park your money,” says Jon Bergtheil, head of global metals strategy at JPMorgan in London. “Copper and nickel have more downside potential than aluminium.” Aluminium for immediate delivery in the so-called cash market is selling for $2,675.80 a metric ton, and futures contracts indicate that prices will reach $2,756 in February. Copper, now at $7,678 a ton, will decline to about $7,350 while nickel will slide from $36,315 to $35,420 on the LME.
Benchmark aluminium for delivery in three months on the LME was at $2,732 a ton as of 9 a.m. London time today.

Rising energy costs threaten to drive up prices because aluminium production consumes 15 megawatts of power for each ton, equal to 370 euros ($501) for the typical smelter plant in Germany. Power to be delivered in 2010 now sells for 55 euros a megawatt-hour, or 825 euros a ton of aluminium, according to prices from broker GFI. Metals prices will keep pace or manufacturers may shut smelters to save money.

“There hasn’t been investment in the industry over the past two decades, and the world will pay the price for that,” says Jim Rogers, the chairman of New York-based Beeland Interests Inc. and author of “Hot Commodities.” “It has much higher energy costs compared with the other base metals, and as plants are taken off stream because of rising costs, we will see a tightening in supply.”

Aluminium also is buoyed by the prospect of the biggest producers wielding more power than OPEC does in the oil market.

Alcoa’s hostile $28 billion bid for Alcan may result in the world’s five largest aluminium producers controlling 54 percent of world supply, compared with 43 percent a year ago. By comparison, the 12-member Organization of Petroleum Exporting Countries pumps 41 percent of the world’s oil.

Alcoa, Rusal, BHP Billiton and the rest of the industry sell about $85 billion of aluminium a year to makers of beer cans, airplanes, window frames and car parts. Higher prices may hurt profits at companies ranging from Pepsi-Cola Bottling Co. to Airbus SAS to Ford Motor Co.

“Alcoa and Alcan getting together, that’s probably the key issue for the commodity right now,” says Tom Williams, the head of purchasing for Airbus in Toulouse, France. “We want to be sure that whatever happens we still end up with a sensible competitive environment at the end of it.” The average airplane is 80 percent aluminium.

Alcoa wants Montreal-based Alcan so it can expand capacity to meet a doubling of demand by 2020, according to spokesman Kevin Lowery. This year, production will outstrip demand by 576,000 tons, according to CRU, a London-based metals consultant.
`Bring Strength’

The takeover “will bring the strength of two companies to bear to make sure we can elevate what we do for our customers,” says Lowery. Alcoa, based in New York, is prepared to sell assets to resolve antitrust issues, he said.

Aluminium is cheap relative to every other metal on the LME, the result of production in China. The metal has increased on average 14 percent a year for the past five years, compared with 26 percent for tin and 42 percent for lead.

The price of aluminium will rise next year to $3,086 a ton, or $1.40 a pound, up from an earlier forecast of $1.30 a pound, according to Dan Brebner at UBS in London, because of raw material and energy costs. Aluminium has averaged $2,774 a ton so far this year.
“In 2008, it looks like aluminium could outperform the other metals,” says Brebner, executive director of commodities research. `Significant’ Positions

China’s decision on June 19 to rein in production by removing a tax rebate on shipments of aluminium rods and bars may result in the country importing more aluminium than it exports by 2009, said Michael Widmer, head of metals research at Calyon in London.
“That should be a big support for prices,” he said.

Demand for aluminium in China, which is also the world’s largest consumer of the metal, will grow 20 percent this year, outstripping the rise in domestic production, Deutsche Bank AG said in a June 22 report. Investors who followed Deutsche Bank’s advice to buy aluminium in April 2005 earned a 49 percent profit in 16 months.

The average person in China uses 10 kilograms of aluminium a year, and the average Russian 5 kilograms, compared with 34 for the typical American and more than 50 for a German, according to Rusal estimates.

Forward Buying
Charts tracking aluminium for delivery 63 months from now show the greatest demand after 2008. The price for the December 2010 contract gained 9.5 percent to $2,410 a ton as of June 22, while the most widely traded three-month contract has lost 1.8 percent during the same period. “The far forward fund buying is significant,” says Mo Ahmadzadeh, president of metals trading at Mitsui Bussan Commodities in New York. Rusal, created this year through the merger of OAO Russian Aluminium, OAO Sual Group and the alumina unit of Glencore International AG, is anticipating a surge in demand. The company plans to expand three plants and build two more as soon as 2012.
Chief Executive Officer Alexander Bulygin said in March that aluminium may reach $4,000 a ton as early as next year.

Aluminium has a “very favorable long-term outlook,” Artem Volynets, Rusal’s head of strategy, said in a June 29 interview in which he declined to give a specific forecast. “We expect to see a very interesting picture when China shifts into the importer position.”
Prices also are helped by a slowdown in smelter construction. Aluminium Corp. of Bahrain is facing a natural gas shortage that may scuttle a plan to increase annual capacity to 1.2 million tons. Alba, as the company is known, is trying to buy gas from Qatar to supply its factory.

“If you look past the next five years, some people see very little downside because they believe there will be less supply and the cost of producing this commodity will only go up,” says Adam Rowley, an analyst at Macquarie Bank Ltd. in London. Increasing energy demand worldwide means “there is less need to sell it cheaply to smelters.”

OUTLOOK
Aluminium is cheap relative to every other metal on the LME, the result of production in China. The metal has increased on average 14 percent a year for the past five years, compared with 26 percent for tin and 42 percent for lead.

On the positive side,

§ Takeovers of Alcan Inc. of Canada and Russia’s OAO Sual Group may reduce Aluminium production as China, the world’s largest supplier, cuts exports.

§ Demand for aluminium in China, which is also the world’s largest consumer of the metal, is expected to grow 20 percent this year, outstripping the rise in domestic production. The average person in China uses 10 kilograms of aluminium a year, and the average Russian 5 kilograms, compared with 34 for the typical American and more than 50 for a German.

§ Rising energy costs threaten to drive up prices because Aluminium production consumes 15 megawatts of power for each tonne, equal to 370 Euros ($501) for the typical smelter plant in Germany.

§ China’s decision on June 19 to rein in production by removing a tax rebate on shipments of aluminium rods and bars may result in the country importing more aluminium than it exports by 2009.

§ Prices also are helped by a slowdown in smelter construction.

On the negative side,

§ Economic slowdown in the US, world largest economy is declining the demand of Aluminum. Automotive demand, the biggest market for Aluminum. It is highly used in housing sector. Slump in housing and manufacturing sector in US is giving negative pressure on Aluminum prices.

§ Crude Oil prices are near record highs in real terms and threatening economic growth. Crude Oil is expected to reach the level of $78-$80, this year. Hike in Crude Oil, generally, halt the economic activities in the economy, as it increase the inflationary pressure in the economy.

§ Hefty stocks at London Metal Exchange (LME) warehouse. In general, investors track the trend of LME while trading in Base Metals. Depleting stocks in warehouse is considered as a bullish sign for any Metals and vice versa. All Base Metals have seen heavy decline in stock position in LME. Some of them still gaining momentum in the market on continued decline in inventory position. But, in case of Aluminium, it has witnessed rise in the stock position, which is compelling it to trade with bearish sentiments.

Aluminium prices are likely to remain weak in the near-term, and they are likely to settle at $2,600 a tonne

Aluminium’s contribution to sustainable modern living Aluminium is a young and modern metal. It has only been produced on an industrial scale since 1886 when Hall and Héroult independently discovered how to produce aluminium through electrolysis. In 1900 annual output of aluminium was 1,000 tonnes. By the end of the 20th century the annual production had reached 32 million tonnes comprising 24 million tonnes of primary aluminium and eight million tonnes from recycled metal. This makes aluminium the world’s second most used metal. A world without aluminium has become unimaginable. The business traveller, the tourist and the freight company are dependent on it as the commercial aviation and space industries would never have achieved ‘lift’ off without aluminium. The metal makes a key contribution to fuel efficient engines in cars and trucks, as well as to high speed rail and sea travel. By reducing the vehicle’s weight, it cuts down on fuel consumption and emissions without compromising size or safety. Aluminium facilitates the construction of corrosion resistant and low-maintenance buildings. Around the world, most long distance overhead transmission and distribution lines are made of aluminium. Aluminium in packaging preserves food quality, reduces waste and provides convenience for the users. Aluminium can be rolled into ultra thin foils, which are light, strong and have unique barrier and insulation qualities, it preserves food, cosmetics and pharmaceutical products by protecting them from ultraviolet light, odours and bacteria. Aluminium is also the most cost-effective material to recycle.

Packaging of all types, including aluminium, saves about 30% of the world’s food from wastage. Less than an ounce of aluminium sprayed on a polymer forms a thin heat reflecting sheet that can keep a newborn baby warm or save the life of someone on an exposed mountain top. Aluminium has a particular advantage for use in arctic climates, as it retains all its performance properties at low temperatures. The aluminium industry directly employs over a million people worldwide and indirectly generates four times as many jobs in downstream and service industries. International representation As aluminium is a global commodity, the industry has adopted a global approach to sustainable development issues through its international body the International Aluminium Institute (IAI). IAI currently has 21 member companies representing almost every continent. The split of total primary aluminium production between OECD and non-OECD countries is roughly 50:50.Together the member companies produce around 60% of the world’s primary aluminium and a significant proportion of the world’s recycled metal. IAI is involving the Chinese and Russian producers and aims to bring the Institute’s coverage to around 90% of world production. The compact structure of the industry facilitates the gathering of global performance data and the spreading of good practice through benchmarking. As a result, IAI is already monitoring and reporting on a number of widely used sustainable development indicators such as energy use, greenhouse gas emissions and safety performance.

Since 1997, IAI has collected comprehensive benchmarking data on safety performance in the global aluminium industry and information is shared on accidents, near misses and their causes. Such benchmarking data is a driving force for continuous improvement. Many companies have a policy of zero accidents as their target. IAI’s Health Committee plans to collect global statistics on occupational illness and benchmark performance. These statistics will be regularly updated. The aluminium industry has a number of elements in its current environment, health and safety programmes, which would enable it to become a pioneer in the field of global industrial reporting on sustainable development.

Life cycle

Aluminium stands to benefit from the sustainable development approach, because its real impact on the environment can only be judged in terms of a full cradle-to-grave life cycle analysis. It is a sustainable material, whose recyclability and applications justify the high-energy requirement of primary aluminium production.

During an automobile’s construction a kilogram of aluminium can replace two kilograms of conventional heavier materials, thus contributing to the reduction of the vehicle’s weight and therefore its fuel consumption. This means that, over the vehicle’s lifetime, every kilogram of aluminium used saves the equivalent of 20 kilograms of CO2.
Current estimates show that globally there will be, by the year 2020, a 35% increase in CO2 emissions from all vehicles. An increased use of aluminium would reduce this increase down to 28% thus making the transportation sector more sustainable.

Description

Aluminium is a silver to white coloured, highly elastic, ductile element having atomic number 13 in the periodic table. It is a light metal with only 1/3rd density as compared to that of steel. It is as good a conductor of heat and electricity as the metal copper is. Aluminium is known for its feature of being resistant to outside weather, atmospheric gases and liquids. That’s why it is largely used in the cold conditions where it maintains its toughness unlike other metals and gains advantage over the metals carbon-steel and copper etc. Non-toxicity and non-magnetic are some of the other characteristics of this metal.

Aluminium’s abundance in the earth’s crust stands third among other elements. But it is not found in the free state anywhere in the world but in combined form with other materials in the ore form.

Aluminium is a newly discovered metal as compared to the other metals like copper, silver etc as it was found in the 18th and 19th century only. It is the most eco-friendly metal and is also sound technologically and economically. This fact gives aluminium the second place in the list of the largest consumed metals in the world after steel and it is often termed as a versatile metal. It also has unique and numerous properties such as gas resistant, moisture-vapour resistant, grease and oil resistant, corrosion resistant, reflective, lightweight, recyclable etc that makes it stand out when other metals are compared to it. On behalf of all this, it can be said that this metal is irreplaceable.

Aluminium is extracted from the aluminium ore, most commonly bauxite that is found in the areas lying in the tropical and the sub tropical belt on earth. Aluminium constitutes 8% of the earth’s crust. Large deposits of bauxite are located in the continents like North America, South America, Africa, Australia and Asia and small deposits in Europe.

The world production of aluminium is around 28.9 million tons, China being the largest producer followed by Russia, Canada and United States. As already mentioned that aluminium stands second in the largest consumed metals in the world, it is also true that the world consumption level has also risen significantly in the last few years.

History

The metal aluminium hasn’t got a long historical background behind it, as it is relatively a new discovery but the salt of this metal has been used for a long time. In around 5300BC strong pots and bowls were made from the clay consisting large amount of the metal salt in Persia. In around 2000BC, ancient Greeks and Romans made use of the salts of this metal as a dying agent and for the purpose of dressing wounds. At that time the salt was known by the name ‘Alum’. The name of this base salt was changed to ‘Alumine’ by a French chemist and politician named Guyton de Morveau in 1761.

It was in 1808 when a chemist and physicist named Humphry Davy found out the presence of metal base in this salt and named the element Aluminium though he was unsuccessful in extracting the actual element.

After a few years of experimentation, in 1825, a Danish chemist, Hans Christian Oersted was successful in attaining an impure lump of aluminium metal, which was developed further by Friederick Wohler by mixing aluminium chloride with potassium. With time the process of extraction of aluminium was improved and in 1859, with the help of the emperor Napoleon III, first ever aluminium factory was established.

The statue at Piccadilly Circus, London that is known by the name of Eros was one of the first statues that were made by this metal. Till then the process of extracting aluminium was very expensive and it was a highly prized, considered to be a semi precious metal but in 1886, Hall and Heroult invented a new process of extraction and still the improved version of that process is used commercially throughout the world.

Aluminium Production

Aluminium ore, most commonly bauxite, is plentiful and occurs mainly in tropical and sub-tropical areas: Africa, West Indies, South America and Australia. There are also some deposits in Europe. Bauxite is refined into aluminium oxide trihydrate (alumina) and then electrolytically reduced into metallic aluminium. Primary aluminium production facilities are located all over the world, often in areas where there are abundant supplies of inexpensive energy, such as hydro-electric power.Two to three tonnes of bauxite are required to produce one tonne of alumina and two tonnes of alumina are required to produce one tonne of aluminium metal.

Aluminium producing countries

Aluminium is abundantly present in the earth’s crust. The ore of the metal i.e. bauxite generally occurs in the tropical and sub tropical areas of earth and is present in almost all continents except Antarctica with the estimated deposits of 65 billion tons. Production of aluminium from bauxite ore requires three stages i.e. mining of the ore, refining of the ore to produce alumina and finally smelting of alumina into aluminium. To obtain 1 ton of metal, 2 tons of alumina is required and for producing 1 ton of alumina, 2-3 tons of bauxite is required. The only ore other than bauxite that is used for extracting aluminium in some areas is nepheline.

The major bauxite exporting countries are:

C Guinea
C Jamaica
C Surinam
C Australia

LOCATION OF ALUMINIUM SMELTERS

THE MAJOR PRODUCERS OF PRIMARY ALUMINIUM IN THE WORLD

United States of America
C Russia
C Canada
C European Union
C China
C Australia
C Brazil
C Norway
C South Africa
C Venezuela
C Bahrain
C United Arab Emirates
C India
C New Zealand

The global production of aluminium figures around 29 million tons and the above-mentioned countries share more than 90% of the aluminium production. China topped the chart in 2004 producing around 6.1 million tons of metal. Russia with 3.6 million tons, Canada with 2.64 million tons and USA with 2.5 million tons of production followed China. The import – export situation of this metal is dependent upon the demand supply mismatch in the world.

Consumption in the African continent is much lower than the production level and that states that countries in the African continent have a high exporting ability.

Demand

The consumption pattern of aluminium in India is different from the global consumption pattern. The demand for the aluminium industry has been predominantly from the electrical sector. This sector is the largest end user of aluminium in India accounting for 36 % of the total aluminium demand. The transport sector contributes to another 22 % of the total demand while the consumer durable and packaging sectors consume 12 % each. The construction sector consumes 7% of the total aluminium demand. Total domestic consumption was about 0.55mn ton in FY98.

In the power sector aluminium is used in conductors, extrusions, foil wraps and even conductors for overhead transmission. Conductivity of aluminium being greater than that of copper it is preferred to the latter. In terms of price aluminium again comes out as the winner.
Another sector, which consumes aluminium to a great extent. is the automobiles sector. This sector accounts for 22 % of total consumption of aluminium in India.

Aluminium has an advantage over steel due to its higher strength to weight ratio, which helps reduce fuel cost. The metal also has a higher thermal efficiency, which leads to better engine performance.

In India, the use of aluminium in passenger car stands on an average at 20 kg in comparison to 30-35 kg witnessed in other developing countries and 80–100 kg in the US. In India, Maruti Zen has the highest aluminium content amongst all the vehicles. Many more Indian cars could start having aluminium engines. Audi the German car completely made from aluminium.

In the construction sector, aluminium could replace wood with the government discouraging the use of the same. In the packaging sector aluminium foils could replace plastics since they are more convenient apart from being very effective.

The packaging sector accounts for 12 % of the total aluminium consumption. The sector approximately consumes 50,000 ton of aluminium per annum. Packaging sector uses aluminium for manufacture of cans, containers collapsible tube foils and closures. Foils are increasingly being used for packaging food products, tobacco pouches, pharmaceutical strips and inner lining of tetra packs.

Packaging is growing at a faster rate as a result of rising consumerism and growing brand awareness in India. Aluminium is also a substitute for tinplate glass paper and jute. The concept of soft drink in cans has not caught on in the Indian market because of the markets being highly price sensitive. While in urban area’s aluminium cans do find some takers, consumption of cans in rural and semi urban areas is absolutely miniscule. Producers in India are therefore reluctant in setting up a aluminium beverage can unit Aluminium to a large extent is also used in consumer durable. The high thermal efficiency, conductivity, corrosion resistance and low weight of aluminium makes it ideal in the consumer durable sector especially in the manufacture of electric fans air conditioners and coolers where it is used in the form of extruded flat products. Aluminium is also increasingly being used in gas cylinders, cycles, rigid food and non food containers, mines prop and beer and beverage cans

Supply

Production of primary aluminium is done in three stages. It starts with the mining of bauxite, a reddish-brown aluminous earth found in tropical latitudes in Australia, South America, India, the Caribbean and Africa. Bauxite is then refined to produce alumina, which is then smelted to produce aluminium.

To produce one tonne of primary aluminium takes two tonnes of alumina, which in turn takes four tonnes of bauxite. The reduction of aluminium from its oxide, alumina, is very power-intensive, hence why significant parts of world primary aluminium production are located near cheap energy sources, whether it be hydro-electric power in Canada or near the oil and gas fields in the Middle East. Interestingly, when OPEC limited oil exports in the Middle East in the 1970’s, oil producing countries found themselves with surplus oil production capacity which they were not allowed to export. Instead they converted the oil and gas to electricity and produced aluminium which could then be exported. A very clever way to get around the OPEC restrictions.

It is important to understand the huge energy requirement need to make primary aluminium. The Hillside smelter in South Africa produces around 460,000 tpy of aluminium, but to do so takes the of equivalent to about 5% of all the electricity consumed in South Africa. Recycled aluminium plays an important part of the supply chain as aluminium’s use in packaging often has a short life span. To produce aluminium from scrap aluminium costs a fraction of the cost of producing primary aluminium. To produce one tonne of aluminium from scrap consumes only 5% of the amount of electricity that it takes to produce one tonne of primary aluminium.

RECYCLING ALUMINIUM

i. By recycling aluminium cans, it takes only 4% of the energy to recycle them than to produce them from raw materials. Recycling aluminium can saves up to 95% of the energy needed to make a new one.

ii. Recycling 120 aluminium cans saves enough energy to run a 3-bedroom house for one day.

iii. If all of the aluminium cans recycled in the UK were laid end to end they would stretch from Lands End to John O’Groats 160 times!

iv. There would be 12 million fewer dustbins per annum in the UK if all aluminium drinks cans were recycled.

In LME warehouses certainty is possible because metal stored in warehouses belongs to the owner of the document or receipt, which is issued, by the warehouse company when the metal is first placed in the warehouse. A document of possession, issued by the warehouse company, for each lot of LME approved metal held within an LME approved facility is called “LME Warrant”. The warehouse companies can only issue warrants if they are satisfied that the metal conforms to the specified covering quality, shape, and weight as defined by the special contract rules of the LME, and is of brand or production of a producer named in the LME-approved list. In fact, a relatively small percentage of LME contracts result in a warrant delivery, as majority of contracts are used as a hedging tools, which are bought or sold before expiry date or delivery date.

However, London Metal Exchange does not run or operate its own warehouses. In fact it approves geographical locations globally as good delivery points and then approves warehouse companies, which operates within those locations provided with specific facilities. Now, these approved warehouse companies set fixed rents, which is charged on yearly basis against the storage of LME- warranted metal. These rent charges are published by the exchange and become effective on the beginning of every new financial year i.e. 1st day of April every year. Also if there are any changes to the costs of the rent, in that case warehouse companies has to inform the exchange by giving notice, further which is given to LME members at least three months prior to the operative date.

Request for opening warehouse in new location is led by the industry and formal application must be made to the exchange by the port authority who will be asked to demonstrate that the proposed delivery point is in an area of net consumption of the metal and it is capable of becoming a natural, logistically sound mode for the passage of metal which is to be delivered on final consumption point. The number of shipping lines servicing to the port, working practices at the port and the rail and road infrastructures are also taken into account when consideration is given to the location. LME-listed warehouse companies are independently owned, and only substantial companies are considered for approval.

The approved companies or the warehouse companies holding LME warranted metal are subjected to get audited at least once in a year by an independent audit firm. Other than these audit firms, the LME executive staff also enforces a program of spot checks on all significant warehouses during the course of the year. LME has maintained its position worldwide in providing a good, representative pricing mechanism.

Consequently, there is an ongoing study in LME on setting up the new warehouses in existing as well as non-existing countries. The study is based on the policy that warehouses should be set up on those locations where there is net consumption rather than production. This helps to avoid undesirable dumping of the metal by the producers. The expansion of the delivery network is essential to the LME for long term to encourage consumer confidence. Also, the greater the network, greater will be transparency and further more useful are LME stock reports for the investorsthe market. Receivers of LME-warranted metal must be aware, that warehousing is a complicated business, logistics of which need to be done by careful planning as there may be other parties also which can wish to take metal from the warehouse at the same time.

Therefore, a receiver has to maintain close connection with these warehouses to ensure that satisfactory delivery schedules are achieved. As a result, deliveries that do take place, either in or out of warehouses, strongly reflect the physical market demand and supply. Because of this, the LME’s daily stock reports play a major part in the assessment of prices quoted on bourses. These daily reports are required to report LME by the warehouse companies at 16:30 hours (U.K time) each business day. After that, these stocks are published at 09:00 hours (U.K. time) on the following business day. They are published via the LME’s vendor feed system, which provides information to international quote vendors.

Many of the participants in the market for base metals would probably expect a strong negative relation between LME warehouse inventories and 3-month forward prices over long periods of time. In other words they would expect lower inventories to be associated with higher prices, and vice versa. However, the existence of a strong negative relationship between inventories and prices does not guarantee the profitable trading signals always as other economic factors also determine the prices. But somewhat analysis suggests that the market more often is slow to react, than not, to significant changes in LME inventories for most of the base metals.

However, it is possible to construct fairly simple yet profitable inventory based signals. This will get clearer from below mentioned charts, which shows the relation between movements in stock position and prices. Below mentioned charts shows the scatter diagrams for the 3- month forward prices of the four LME base metals against their respective LME inventory levels using weekly data from June 30th 2008 to August18th 2008. For e.g.- if we look at the copper chart, it can be seen that there is continuous rise in inventory level in a given interval of time and reacting to that the prices are taking downward direction, which confirms that there is a negative relationship between warehouse inventories and prices. While in case of zinc, negative relationship is there but trivial change in prices can be noticed comparatively to change in inventory level, which signifies that this information is useful in the design of trading signal. In other words, it means that it is probably better to use percentage changes rather than changes measured in levels.

Base Metals
Prices (‘000 US$) vs. Inventory (‘000 tonnes)

Similarly, in following charts Lead and Nickel movements are also up to some extent proves a negative relationship between price movement and change in inventory level.

So from above study we have seen that one can take profitable signals from warehouse released data and definitely can generate profits out of it from both long and short positions, i.e. in both bear and bull markets and in both moderate and high volatility market. But also one has to take other factors into consideration because as mentioned earlier level changes in warehouse inventories can only helps in taking cues or signals and not definite call.