The company increased the projected growth rate for Chinese primary consumption this year to almost 36% and estimates China increasing their production by 34% this year, a total production number of 12.5 million tons per year. There is no evidence that export bans have led to inventory build and the management believes that their growing domestic consumer-driven market will absorb all of this production coming onstream this year and next.

- Latin America is up 7.8%, driven by strong demand in Brazil;
- Asia excluding China is up 5%, driven primarily by India, Vietnam and Thailand;
- the U.S. is softening with a projected decrease of 6% in consumption year over year.
- The whole world, pulled by China and the other BRICK countries is estimated to grow in excess of 10% this year.

Even with all of this smelter capacity growth in China, they are still not self-sufficient.

They remain a net importer of aluminum and when looking at the whole picture and including scrap imports, which were more than 200,000 tons in August, they have exceeded 1 million tons this year. So Alcoa continues to see robust demand in China and strong markets fundamentals. At the same time, they continue to look for opportunities outside of their country for bauxite, for alumina, for aluminum indicating that the power situation and the high cost of alumina will eventually constrain their growth and create opportunities elsewhere.

In summary, the latest supply and demand balance is as follows:

- For alumina, the company has again lowered its projection from a range of balance to 1 million tons surplus, to a range of balance to 500,000 ton surplus, driven by slower ramp-up and brownfield expansions and higher Chinese metal production.
- The spot market for alumina supports this change. Recent prices have exceeded $375 per ton.

For aluminum, Alcoa continues to project 300,000 tons of surplus for 2007, but this is less than 1% of the 38 million tons, or about 3 days of global supply.

The company can''t be precise on the in-process inventory build up at both primary production and fabricated locations in China, as well as the logistic friction, this is not a worrisome number but for sure, China will remain the arbiter of world prices in the coming years in the industry.

In the quarter, the end markets went through their normal summer slowdowns.

- This year, that impact was compounded by the uncertainties in the financial market and the destocking occurring at the distributor level.
- Aerospace continued to be a very strong end market, with Boeing, Airbus, Embraer and Bombardier continuing to report robust growth in order backlog.
- Commercial aerospace deliveries are up 7% in the first half of 2007 and are forecast to increase 12% in 2008.

In the short term, the supply chain is in an overstock position.

This has led to destocking of distributor inventories which has adversely affected the shipment mix of some of the company’s businesses in both the U.S. and Europe. The company anticipates this destocking continuing into the first quarter of next year and in addition, the delay of the A380 has had an impact and that demand is expected to pick up late in the first quarter of next year.

North American automotive markets continue to present persistent weakness.

In addition to the anticipated summer shutdown, more pronounced production declines due to overtime reduction at Ford and Chrysler and lower demand for light trucks are expected. Higher inventory levels in the quarter will likely lead to further reduction cuts in the first quarter and seasonal adjusted sale rate is now estimated down to 60 million units, the lowest mark since 1998.

North American Class 8 truck demand has softened due to the large 2006 prebuy.

- They are down about 54% from the prior year and 42% year-to-date, and the fourth quarter Class 8 production is expected to be even lower than the third quarter level, impacting also trailer build rate.
- Non-residential building and construction markets remain strong in spite of the prevailing uncertainty in the credit markets.

Strategic Initiatives

In the upstream market, the company’s strategic direction is focused on securing key bauxite reserves and low-cost stranded power, with a strong preference for renewable power. The management is focused on repowering its North American and European smelters through power contract extensions as well as joint venture arrangements. Alcoa continues to invest in breakthrough technologies for its smelters and refineries.

The company continues to work in Brazil on the Juruti bauxite mine development, the Sao Luis refinery expansion, and a growing number of hydro projects.

Alcoa continues to move forward on a potential refinery in Guinea, another strategic bauxite region in the world.