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adminlOl 125 February, 200904:58 Aluminum prices fell 55 percent (from $3,380 to $1,465 per metric ton, or from $1.53 per pound to 66 cents per pound) from mid-July to late October. In just those three months, prices lost five years of gains. Prices have fallen like a rock because demand has plummeted (greatly influenced by fear and risk aversion), causing the biggest annual visible surplus on record. Prices are trading below average output cash costs ($1,550 per metric ton, or 70 cents per pound), even taking into account much lower energy and raw material prices that have resulted from the global recession. We estimate that approximately 75 percent of global aluminum output is losing money on a cash basis (This does not take into account sustaining capital costs, depreciation nor return on capitaL). Practically all output is in the red if we consider the full cost of producing aluminum. In this context, we expect prices to fall further in the next weeks, as public inventories keep growing given that output continues to lack the flexibility and speed to adjust to depressed demand. We see $1,300 per metric ton (or 60 cents per pound) as probable in the first quarter of 2009. HiTTiNG BOTTOM Nevertheless, when we hit bottom-We believe it probably will be between the first and third quarter of 2009-we could see a "V" type violent bounce in demand and price for a number of reasons, including the historical dislocation of demand VS. its own 10 term trend; the sharp distortion of prices vs. output costs; the unprecedented and aggressive stimulus programs authorities around the globe have introduced on the fiscal, monetary and financial fronts; and the lagged but still significant aluminum output curtailments and expansion deferrals that have taken place in the fourth quarter of 2008. The consensus view is similar, forecasting a "V" bounce in prices starting in the second half of 2009. The bottom line is: Conditions are not present for a sustainable price bounce yet (prices will continue to stay low and to trend downward), but conditions are already present for a potential violent upward move later in 2009. The main reason behind the plummeting prices has been the sharpest contraction in global demand that the aluminum market ever has experienced in a six-month period. We estimate that global demand has contracted more than 25 percent from May 2008 through December 2008. Aluminum demand from the United States and Europe is down approximately 40 percent from its peak in the second quarter of 2008.