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GM, Alcan Sign 10-Year Pact

General Motors said Monday that it signed a 10-year, "multibillion-dollar" deal to buy aluminum from Alcan Aluminum in an effort to further reduce the weight of its vehicles and the amount of fuel needed to run them.

GM "will be able to design more cost-effective vehicles for customers that will provide additional environmental benefits and better fuel economy," said Harold Kutner, group executive of the automaker's purchasing and production control unit.

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What's unusual about the deal is that GM (GM) will purchase the aluminum at "predictable prices" by linking what it pays to the cost of producing the metal, not to the prevailing price of aluminum in the commodity markets. Alcan will be ensured a certain return on its investment, however.

Typically, the market price of aluminum swings wildly, and the costs can occasionally run very high. Steel prices, by contrast, are more stable and usually less costly.

"Because aluminum is traded as a base metal on commodity markets, its price can fluctuate greatly, making it hard for GM engineers and designers to plan for its use in future cars and trucks," the company said in a press release. "This industry-first arrangement enables GM to stabilize the price of aluminum, using third-party financing to manage the pricing risk."

At present, GM buys 1.7 billion pounds of aluminum each year - at a cost of roughly $1 billion - or an average of 210 pounds per vehicle. It plans to boost aluminum usage by 7 percent or more a year. The metal will be used in a variety of automobile components.

GM and Alcan say they will also cooperate on efforts to expand the uses for aluminum, including the creation of "aluminum-intensive vehicles."

The deal will make GM one of Alcan's largest customers, but the automaker will only account for 10 percent of the aluminum company's production. For its part, GM said Alcan will produce close to one-quarter of the aluminum the automaker will need. It will probably seek similar agreements with other metal producers.

Montreal-based Alcan (ALis the second largest global aluminum producer, trailing Aluminum Co. of America. On Friday, Alcan closed at 27 5/16, while Alcoa (AA), a member of the Dow Jones Industrial Average, ended at 79 3/8.

Written By Jeffry Bartash

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