A short-term recovery is possible if there is an understanding between manufacturers for curtailing production. This is most likely as several base-metal plants will become unviable if prices continue its southward movement. However, while this (production cuts) could be the short-term answer, a real recovery would depend on a revival of the Asian economies which again looks unlikely, at least in the short-run. The recent crisis has prompted aluminium-intensive industries like automobiles and consumer durables to cut back on production in anticipation of a sluggish demand.

Reports suggest that reducing inventory levels by stock clearance andexports has gained precedence over production at South Korean companies like Hyundai, Kia and Daewoo in an effort to cushion their bottomlines. The result: analysts are projecting a two per cent drop in consumption of aluminium in 1998. Of the total world consumption of around 187 million tonne, consumption of the Asian region was around 15 per cent.

Europe and America account for 60 per cent of total consumption. The world consumption during the current year is expected to grow by mere one per cent.

This has been further added by the possibilities of some major western world producers restarting their capacities.

These capacities had been mothballed in 1994 as per a memorandum of understanding signed then among producers to stem production losses and buoy prices.

However, while the chances of these capacities being restarted are low since current prices are not very attractive, rising inventory on the LME and lower demand projections are causes for concern. Assuming that global output at this stageincreases by an additional 2.19 per cent, analysts predict a shift from the relatively balanced market of 1997 to a global surplus in 1998. Given this bearish outlook, aluminium prices on the LME are likely to reflect Asian destocking and a subsequent shift in inventories to the West.

Already, primary aluminum production from the former participants of the Memorandum of Understanding on Aluminum, excluding Norway, increased by three per cent in the first quarter of 1998, according to figures released by the International Statistical Contact Group on Aluminum.

The MoU, which resulted in a worldwide aluminum production cut of 1.5 million metric tonnes, was signed by Russia, US, the European Union, Australia, Norway and Canada. The agreement was signed in March 1994, and expired in March 1996. Interestingly, aluminium prices on the LME peaked early 1995 much ahead of the expiry of the agreement at $2150 per tonne and fell to $1296 per tonne by the last quarter of 1996. Similarly, primary aluminum productionin the US also increased by 11,843 metric tons in the first quarter of 1998 when compared with figures for the first quarter of 1997.

According to figures released by the Aluminum Association, Washington DC, the US production of primary aluminum in 1998 totalled 901,606 tons through March of 1998 compared with 889,763 tons in 1997. Overall while the demand recovery appears unlikely in the short-run what could help the aluminium is a possibility of production cut backs. This is more likely as prices have fallen to close to mid-1993 levels and any further fall in prices would make most of the aluminium producers unviable. As such, for their own interest they may go in for production cut. On the other hand, the the metal also has strong support level around $1,275 level. As such, even if it fails to move up, it is unlikely that it will fall further.