September/October 1988
An Interview With Alcoa’s Chief, Paul H. O’Neill
The chairman and CEO of the Aluminum Company of America shares his outlook on the worldwide aluminum market, consumers, and future prospects, and how recycling fits in.
By Si Wakesberg
Si Wakesberg is a New York City-based consultant to the Institute of Scrap Recycling Industries.
The view from the 30th floor of the Alcoa building reveals the entire city of Pittsburgh, its bridges over the Monongahela and Allegheny Rivers, its modern architecture manifest in well-proportioned buildings. Alcoa, whose revenues were up 22 percent in the first half of 1988 compared with the same period last year, is symbolic of the promising young aluminum industry--born Phoenix-like out of the ashes of Steel City.
Paul H. O'Neill reflects the new leadership of the aluminum industry. Chairman and chief executive officer of the Aluminum Company of America since June 1987, he has an informal personality of charm and humor, yet with a decisiveness that is integral to his executive abilities.
In this exclusive interview, conducted in July, O'Neill answers questions from Scrap Processing and Recycling.
Q: Do you think the upsurge in aluminum prices this year has been too rapid? Will this have an impact on future use of aluminum?
A: It has been my custom not to try to predict prices. Frankly, I am not too concerned about short-term changes because you might as well ask, Will prices go down too fast? What does concern me is long-term impact. As producers, we must be knowledgeable about price changes as they affect our customers and not do things in the short term that might harm long-term relationships. But as I look back over the past 18 months, I have not seen anything that might result in a significant conversion from aluminum to other materials.
Q: The London Metal Exchange [LME] is said to be dominating the aluminum market. Recently, an International Nickel Company spokesman said the way is open for nickel producers to make use of the LME. How does Alcoa feel about the LME?
A: We see the LME as an exchange mechanism like any other commodity exchange, one that serves a useful market function. The LME reflects world market conditions, but I don't believe it dominates the aluminum market. Yes, Alcoa uses the LME--let's say in the same way a grain producer would use its exchange. The LME is important but it isn't the entire aluminum market. [The week this interview took place, LME cash aluminum was $1.14 a pound and three-months metal was $1.09, for a backwardation of $0.05 a pound.]
Q: Has Alcoa been able to supply all its customers with needed metal this year?
A: Yes. Markets have been generally good worldwide, yet we haven't found any of our customers out of product.
Q: We know Alcoa buys scrap in the open market. Has it also been buying prime aluminum in the open market?
A: Alcoa does buy some prime metal in the open market, generally to balance local demand-supply situations. But these purchases hardly represent significant amounts. [This] is no different from what we have done in the past.
Q: Has aluminum demand held up in all purchasing sectors during the first half of 1988? What sectors were particularly active buyers?
A: All sectors have shown a good demand level this year, and there's been no weakness exhibited in any purchasing sector. While we don't have statistics yet for 1988, our 1987 figures show that the key consuming sectors included packaging, aerospace, industrial products, international requirements, and metals and chemicals. Every one of these consuming areas last year exhibited a healthy increase in revenues.
Q: Aluminum inventories have been declining. Do you expect this downtrend to continue, or do you see inventories moving up in the second half of 1988?
A: Since we believe that demand and supply are in good balance, it seems to us that there will be a steadying of the inventory levels in the months ahead. Current trend lines appear to be pretty steady, and the outlook is for inventories to remain at fairly even levels.
I think that the aluminum industry--and ... other industries, as well--has learned to live with a lower inventory level than in the past; we don't think there will be an attempt to build excess stocks. At the present time, 3.2 weeks' inventory appears to be reasonable, and that's down about 50 percent from inventory levels of about five years ago. The aluminum industry is redefining its needs in terms of inventory.
Q: Is Alcoa consuming a higher percentage of segregated scrap, other than can stock, than in the past?
A: Yes, Alcoa is consuming a higher percentage of segregated scrap than previously, principally for economic reasons. We are using more of our own plant scrap, which we used to sell in the open market. It makes more sense for us to use as much of our own scrap as we can under present economic conditions.
Q: Are sufficient UBC [used beverage can] scrap supplies coming in? Is can recycling meeting Alcoa goals?
A: While Alcoa collected a record 13.3 billion cans in the U.S. last year-a 12-percent increase over the previous year--we'd like to do even better. Your own ReMA [Institute of Scrap Recycling Industries] survey showed that UBC collections and recycling rose in 1987, and my question is, Why can't we achieve a 100-percent recycling rate? The UBCs recycled by Alcoa last year were equivalent to the output of two average aluminum smelters at a fraction of the energy cost. Our goal should be to press for as close to the 100-percent level as possible.
Q: There appear to be renewed attempts to spur the recycling of steel cans. Do you see this as a competitive threat?
A: No, I don't. The aluminum industry has a substantial advantage over any other industry because of the recyclability of the aluminum can. I look forward to worldwide expansion in UBC recycling as other countries realize the importance of recycling. The aluminum can has already demonstrated its recyclability.
Q: In a recent article you were quoted as telling stockholders to forget about diversification and acquisitions and that, in the future, Alcoa would concentrate on aluminum. Would you care to expand on that?
A: Actually, what I said was, we determined in 1987 not to do any further business diversification while we concentrate on improving performance results of the base business, which is aluminum, and on proving the economic validity of the diversification business we already have. That's a little different than what the article you mentioned implied. Future growth will depend on our ability to produce superior results in the aluminum business--but it doesn't mean we won't do other things, as well.
Q: Looking back on 1987 and the first half of 1988, would you comment on the aluminum industry's recovery generally and Alcoa's progress specifically?
A: It seems to me that worldwide demand for aluminum has been excellent--but this has not been confined to aluminum alone. There's been a very good demand for steel, nickel, and rubber. Nor has this demand been confined exclusively to the United States. Demand has been coming from every part of the globe.
If you recall, during 1983-1986, our industry faced tough times and difficult challenges and had to undergo wrenching changes. Alcoa responded by restructuring its entire organization, by implementing a strict cost-effective program, and by slimming down its operations everywhere. While things are different now, I'm pleased to say that on a recent trip to various Alcoa facilities, I found that the lessons learned during this hard period have not been forgotten. In talking to executives and to plant and production people, I realized that everyone seems to be as acutely aware as they were previously of what's needed to keep the company moving in the right direction.
The lower dollar also has had an impact on the recovery in our industry. So, too, has the remarkable growth of the Asian economy--particularly that of Japan--which helped boost demand for aluminum and other metals. In addition, we see Western European economies improving at a growth rate even better than the 1 percent to 1 1/2 percent one reads about.
Q: When you look ahead to the rest of 1988 and a bit into 1989, what do you foresee for aluminum?
A: I foresee good consumption and a continued good substantial demand throughout this year and into 1989. Aluminum should be looked at as a long-term metal whose future is secure and that has excellent growth potential. Short-term price dips or price rises on the LME will come and go, but they are not the predominant factors in the future of the industry. It's the long-term use of aluminum that counts.
In order for the industry to be able to meet its supply commitments in the future ... recycling is of the utmost importance. It is a vital force which can bring more metal into the market, thus assuring that there will be adequate supply of aluminum to meet the future's greater growth and expanding demand.
The chairman and CEO of the Aluminum Company of America shares his outlook on the worldwide aluminum market, consumers, and future prospects, and how recycling fits in.