Aluminum: the critical issues: edited remarks of Brian Sturgell, executive vice president Alcan Inc., to attendees of The Aluminum Association Spring 2002 Meeting.

For the first time in modern history, our nation has come under attack on American soil and, as a result, shifted public perception of stability and economic well-being.

While it is important for the economy to be strong, industry leaders must take new strategic variables into account. These critical, yet uncontrollable, factors will be influenced more by Washington than Wall Street.

I would like to begin my talk with "critical issues--new realities." While there certainly are critical issues and, as always, new realities, I would add a third thought: recognition and response.

This is an important point in time for all of us; aluminum manufacturers, suppliers, customers and The Aluminum Association. We have weathered some challenges over the past two years. As we look forward, there is hope on the horizon to a brighter economic future.

And that's good news, but the question is, will we seize the opportunity before us to build on the past, initiate new efforts where appropriate and take action to position our material for future growth; or, will it be business as usual? My opinion is that in this global economy, we cannot afford to miss what is a unique opportunity for our industry and our individual businesses--hence the inclusion of the thoughts about recognition and response.

With that brief introduction, my focus today, as chairman of The Aluminum Association, is to present the challenges we face as an industry to the membership and provoke some thought as to how we work within our association to understand and deal with these critical issues and build upon our strengths to secure a better future.

STATE OF THE INDUSTRY

Let's begin with a brief review of the state of the industry. A few key statistics will provide some needed perspective on the aluminum industry's past performance--and on the magnitude of the challenges that still lie ahead.

In late 2001, it came as no great surprise when economists officially confirmed that the U.S. was, in fact, in a recession. There were numerous signs that global business conditions were deteriorating.

Against this global backdrop, the bottom line from the aluminum industry's perspective was that Western world demand for aluminum in 2001 fell by six percent overall, and by a whopping 12 percent in the U.S. That represents the biggest decline in more than 20 years for our industry. Furthermore, with this picture, our industry ended the year with Western world supply exceeding demand by some 400,000 metric tons, despite significant energy-related cutbacks of primary production.

All in all, 2001 could be characterized as extremely challenging. However, are these challenges behind us--or are we, like those who forget history, doomed to repeat this painful period time and time again.

Within the packaging market--focusing specifically on the can market--last year, can shipments in the U.S. were at their fourth best year ever. Both South America and Asia present significant growth opportunities for the aluminum can market.

All and all, early indicators for all of the major market segments are showing signals of varying levels of rebound from the economic recession of 2001.

CONSUMER PERCEPTIONS

It is no secret that the bottleneck for most of our business segments, for some time now, has been the external marketplace. In these marketplaces, we have a significant component that is intangible and very difficult to measure: consumer perceptions.

As you know, perceptions are reality when it comes to consumer behavior. As an industry, we face a range of misperceptions that in subtle and not so subtle ways impacts how consumers view all sorts of aluminum products, from beverage containers to aluminum intensive automobiles to personal care products. And misperceptions can destroy profits and retard our industry's growth.

Unfortunately, research now demonstrates that consumers no longer have an opinion of aluminum. They don't think about it. They don't care. Recycling, our biggest sustainable competitive advantage, is no longer a consumer issue. Here again the issue is not on the consumer's radar screen. Just consider how throughout most of the 1990's the UBC recycling rate was flat and now we are seeing it drop off.

We haven't awakened the public to the fact that, once produced, aluminum can be infinitely recycled with a range of benefits or we haven't made the point in a way that is understandable or meaningful to them. If there is no perceived consumer value--it is unlikely our industry can extract value for this advantage.

We know that we are an industry with many strengths. Our challenge as an association, is to be diligent in protecting and promoting the key drivers of aluminum's success. And our success as an industry will depend on value propositions that represent a mix of material attributes, preserving our commitments to recycling, technology advancements, our reaction to globalization and lastly, innovation--those factors that have helped make aluminum the material of choice for an ever-expanding range of traditional and emerging applications.

SUSTAINABILITY: AN INDUSTRY STRENGTH

From a sustainability and environmental perspective, it's absolutely imperative that we get this message out in a convincing manner: Once produced, aluminum can be repeatedly and efficiently recycled without loss of quality or value.

Environmental leadership is one key to aluminum's future. The many ways that aluminum can positively impact the environment, along with the positive and competitively differentiated attributes of recycling, are truly strategic areas for our industry. We must first understand it ourselves, as an industry, and then we must demonstrate how our industry can carry these messages effectively to key stakeholders and consumers.

The adaptability of aluminum is also demonstrated in containers and packaging and specifically, the aluminum can--a model of extraordinary packaging technology due to its low cost and infinite recyclability.

So, the challenge today is to build on our strengths and position our material at its true potential in everything we do.

OPPORTUNITIES

The question before us is: How do we meet this challenge and leverage these strengths to provide new opportunities for our industry? The problem isn't a lack of awareness in this room--it's outside this room.

Here is an opportunity for us to create value, market our strengths and secure our industry's future in existing and new profitable markets.

Two years ago when discussing the competition and their marketing efforts, mainly the plastic and steel campaigns we are all familiar with, my predecessor, Dick Kerr, addressed to this group and said the following: "We are clearly in a war zone and we must get ready for battle."

There is no doubt that our competition is still waging the battle. The plastic industry is still putting significant dollars behind promotion. The steel industry, for obvious financial reasons, has fallen into a protectionist mode and has shifted its consumer campaign to a protectionist political basis. The point is, we are in a battle for the consumer's mind and for the thoughts of critical decision-makers capable of impacting our industry.

The Association's Can Committee has invested in a multi-million dollar, results-driven ad campaign. This television campaign has demonstrated beyond a doubt that when we make our case, when we remind people about the benefits of the aluminum beverage can, they will be influenced.

In markets where consumers are informed about the can's advantage, the share of PET plastic is rolled back. We can prove that with very specific research findings.

Last summer in Los Angeles we had a fairly hard-hitting ad. The impact of this ad in L.A. and San Diego was extraordinary. We observed shifts in consumer attitudes of 10 percentage points and greater. More importantly, AC Nielsen grocery store Scantrack data showed that the consumer was buying more soft drinks in aluminum cans, reversing a two-year trend of increasing PET penetration.

Feedback from focus groups identified the fact that they were very upset and felt they had been "duped" about plastic being able to be recycled back into a container. But this is our fault--plastics never claimed to be recyclable! Their ads are promoting attributes important to Americans and their beverage packaging rides along by design--masking the real record of the package, but effective nonetheless!

When the consumer understands the real relative benefits of our material, this knowledge translates into sales. The consumer really does care; they simply are acting on their perceptions!

Our ad campaigns have been carried out in tandem with our partnership with Habitat for Humanity. This partnership turns the value of recycled aluminum into homes for low-income families. A public service announcement starring Sammy Sosa in support of the "Aluminum Cans Build Habitat for Humanity Homes" program has been aired on television stations around the country more than 20,000 times.

We are truly doing something good here--homes are being built because recycled aluminum has value--yet we are still faced with problems with our recycling rate.

Let me be clear, these examples focus on the can, but the issue is much broader, linking aluminum to its strategic attributes in the consumers mind is a material challenge.

The author is executive vice president of Alcan Inc., Montreal and Cleveland, and chairman of The Aluminum Association, Washington.