Financial Performance
Alumina Limited’s equity share of AWAC’s* after tax profit was $244 million in 2003 compared to $216 million in 2002; an increase of 13 per cent. Alumina’s cash flow from operating activities in 2003 was $268 million ($273 million in 2002).

This profit performance was due to higher realised alumina and aluminium prices and higher sales volumes. These higher prices reflected an improving world economy and the benefit of higher alumina spot sales driven by growing Chinese aluminium production. Average LME aluminium prices were 6 per cent higher in 2003 than in 2002. These higher prices were offset by a weaker US dollar, higher energy prices and higher raw materials costs.

The majority of AWAC’s alumina is sold under long-term contracts. However in response to the strong alumina spot market, AWAC restarted idle capacity at its Point Comfort refinery six months earlier than planned. Also, following Alcoa’s announced curtailment of production at its North American smelters, additional alumina was available for sale into the spot market.

Alumina Limited’s share of dividends received from AWAC for 2003 was higher at $284 million, compared with $281 million in 2002. Of these dividends, 94 per cent were fully franked. Fully franked dividends of 20 cents a share were declared for the year, up from 18 cents in 2002, representing a payout ratio of 97 per cent of profit.

Production performance
AWAC increased alumina production in 2003 in response to improving alumina and aluminium markets. AWAC’s total alumina production was 13.1 million tonnes, a 6.2 per cent increase from 2002.

Increased production was predominantly achieved by returning Point Comfort to full capacity in June and capacity creep at other refineries. Record alumina production was achieved at Pinjarra, Wagerup, São Luis, Suralco and Jamalco.

AWAC’s aluminium production in Australia also increased by 1.7 per cent in 2003 to 384,000 tonnes, with record production at both Point Henry and Portland. The increase reflected a higher level of operating efficiency at the Victorian smelters.

Costs affected by weaker US dollar
The total cost of alumina and aluminium production in 2003 in US dollar terms was higher than in 2002. This was due to the increase in the Australian dollar and the euro/US dollar exchange rates, higher production levels, higher oil and gas prices, higher raw material costs, and costs incurred to start up additional capacity at Point Comfort.

The AUD/USD exchange rate increased by 33 per cent from US$0.57 at 31 December 2002 to US$0.75 at 31 December 2003, and averaged US$0.65 for the year; 11 cents higher than for 2002. AWAC hedged approximately 46 per cent of its Australian dollar costs in 2003. AWAC has no currency hedging in place for 2004 onwards.

A consequence of the weaker US dollar is a charge to Alumina’s profit of $25 million after tax for the revaluation of accounts receivable and payable in Alcoa of Australia. There was also a reduction in Alumina’s tax expense in 2003 of $13 million following a change in Australian tax legislation. AWAC does maintain limited short term energy price hedging to reduce volatility in natural gas and fuel oil prices. It is AWAC’s and Alumina’s current practice not to hedge its aluminium and currency price risks.

One of the principal challenges for AWAC in 2004 is to improve operating performance to counteract higher energy prices, a weaker US dollar and reduced tonnages available for sale into the spot market.

	Aluminium is inherently versatile, highly valued for its light weight and non-corrosive properties, and for its strength and durability. The increasing variety of uses for aluminium in the manufacture of building, automotive, aeronautical, recreational and household products reflect its many qualities. Aluminium is increasingly sought by the motor vehicle manufacturing industry. Its strength and light weight can reduce fuel consumption and therefore emissions. The widely acclaimed Audi A8 is constructed using an Aluminium Space Frame. The lighter weight also improves vehicle handling, while the metal's ability to absorb kinetic energy provides greater protection for vehicle occupants. Aluminium is also widely used in the power industry. On a weight-for-weight basis it can carry twice as much power as copper, significantly reducing power loss and therefore improving energy conservation. The power industry now uses high-voltage aluminium cables to transport electrical power over long distances. Aluminium also forms the base of 95 per cent of electric light bulbs, of which some four billion are manufactured every year in the US alone.

AWAC had cash of US$98 million and debt of US$123 million as at 31 December 2003. Alumina Limited had cash of A$165 million at year end and borrowings were A$467 million (US$351 million) at 31 December 2003. The strengthening of the Australian dollar to US$0.75 from US$0.57 at the start of the 2003 year reduced the Australian dollar debt balance by A$147 million. Net interest costs for the year of $6 million were lower due to continuing low US interest rates. AWAC's capital expenditure of USD170.2 million in 2003 was equivalent to 100 per cent of depreciation compared with 72 per cent in 2002, with the increase due to the Jamalco expansion in 2003.

Sustaining capital expenditure in 2003 as a percentage of depreciation was 66 per cent, and assisted AWAC to continue to pay a high level of dividends.

Other developments
Options previously issued to WMC Limited Group employees were exercised, which resulted in the issue of 13,071,920 shares for total consideration of $56 million.

	China is the world’s second-largest aluminium consumer and its consumption will continue to dominate the outlook for global aluminium demand. Chinese consumption has grown from 5 per cent of the world total in 1990 to approximately 20 per cent today. This strong growth in Chinese demand is still in its early stages as the Chinese economy begins to benefit from growth in domestic consumption and higher per capita income levels. Domestic growth is expected to remain the primary driver of China’s aluminium consumption over the next one to two decades, and consumption requirements are forecast to be largely met by domestic aluminium production. China’s alumina supplies, however, are likely to be insufficient to meet growth in domestic aluminium production. Chinese alumina production and alumina imports are forecast to grow substantially in coming years. These developments in the Chinese market provide pportunities for alumina producers such as AWAC, with capacity to expand alumina production, to meet the shortfall in Chinese domestic alumina supply.

Market review and outlook

The higher aluminium prices reflected increased demand and a lower US dollar and confidence in global economic growth. LME inventories increased to 1.4 million tonnes at year end. The aluminium price improved in the second half of 2003, averaging US$1,473 per tonne. The price of alumina for long-term contracts also rose during 2003 due to higher aluminium prices and a tightening in the world-wide balance between supply and demand. Spot alumina prices rose significantly due to increasing demand, particularly in China, with spot prices at the end of 2003 more than double those of 2002.

Global demand for aluminium and therefore alumina continues to be strong. During 2003, the two largest markets for aluminium –China and the US – both increased aluminium consumption. China’s economy recorded strong activity in the key areas of building, manufacturing and automotive manufacturing. The outlook is improving for those metal-consuming sectors which are key markets for aluminium.