The dramatic depreciation of the rand has had dire consequences for South Africa's aluminium-product makers, who are now paying upwards of 20% more for aluminium extrusions, after price increases in November and earlier this month.

More increases could be effected, if the rand depreciates further and the volatility of the aluminium price on the London Metal Exchange (LME) continues.

Some aluminium products manufacturers have questioned the rationale behind linking the price of locally- produced aluminium to that prevailing on the LME, which is quoted in foreign currency.

The price of aluminium extrusions was increased by 4% on November 16 – six weeks before it soared by a further 17% on New Year's Day.

Announcing the second increase in a circular distributed in December, aluminium semi- fabricator Hulett-Hydro Extrusions MD Colin Little blamed what he describes as the collapse of the rand and the soaring price of aluminium on the LME, warning that, "in the current climate of currency and commodity-price volatility, further increases with short notice periods are likely".

The LME price of aluminium shot from $1 259/t on November 8 to around $1 420/t last week, and observers predict a slight increase over the next 15 months. "By slight increase I mean not more than $100/t," one market watcher tells Engineering News.

While Little is at pains to explain that the price increases were unavoidable, aluminium-product maker Custom Cases MD Gavin Mudie remains unconvinced of this fact. "Why is it that the prices of locally-produced aluminium sheets and extrusions are linked to the LME?" he asks.

"This means that when the rand falls – as has happened in the last few months – and the producers of aluminium ingots for the export market are getting about 30% more in rands for their products, local producers of aluminium products also have to pay a higher price.

"The local price should be based on local conditions and, with the drive to increase exports, it would help local manufacturers to gain an international competitive advantage, if we were not paying London-based prices." Aluminium Federation of South Africa (Afsa) executive director Dr Tony Paterson explains that the main input used in the manufacture of aluminium – alumina – is imported from Australia by BHP Billiton, South Africa's sole aluminium-billet maker.

In addition, BHP Billiton and national power utility Eskom have a longstanding agreement in terms of which the former buys electricity at a price linked to the LME price of aluminium.

"The dollar-based cost of producing aluminium billet is significant, and semi- fabricators like Hulett-Hydro Extrusions are simply passing on the increases to the aluminium-product manufacturers," says Paterson.

"It is not comforting for us that prices have had to be increased," he adds.

The Afsa boss says the agreement between BHP Billiton and Eskom was concluded in the early 1990s, and is not a ploy to cash in on the depreciating rand.

However, he says the industry is doing its best to contain other costs to avoid further price increases.

BHP Billiton spokesperson Michael Campbell agrees with Paterson that the dollar cost of producing aluminium is significant, pointing out that alumina, which is imported from Western Australia, and coke, which is sourced from the US, together with electricity – which is essentially priced in dollars – account for 70% of total production costs. "The greater part of our costs is dollar-based, and our rand prices will go up when the rand depreciates," he says.

Campbell says the agreement to link the price of electricity to the prevailing aluminium price on the LME "was an attempt to smooth input costs".

He explains that if the price of electricity remains constant when the price of aluminium slumps the viability of smelters may be affected.

"In terms of the current agreement, the dollar price of electricity fluctuates in line with changes in the LME price of aluminium," says Campbell.

"Smelting is a continuous process, and if a smelter closed . . . it would take a long time to reopen it," he adds.

Meanwhile, Paterson says that the price of aluminium is forecast to increase to around $1 480/t in March 2004.

To subscribe to Engineering News's print magazine email subscriptions@creamermedia.co.za or buy now.