• April 28: definitive creation of Techpack Asia. Ninety-five percent of the Indonesian company is owned by Techpack, a subsidiary of the Pechiney Group and a world leader in plastic packaging for cosmetics and perfume, and 5% belongs to Nurtjahya Tanudisastro, who owns the Indonesian group Tiger.
• May 27: adoption by a special general meeting of holders of Pechiney preferred shares “B” of the proposed conversion of preferred shares “B”into common shares “A”. Pechiney’s capital stock now totals € 1,259,997,440.75, represented by 82,622,783 common shares of a single category.
• June 5: signing of an agreement for the purchase by Pechiney Plastic Packaging Inc. (PPPI) of Novacel, the Mexican leader in specialty flexible packaging for USD 90 million. This transaction implements the Group’s strategy of international growth in targeted markets.
• June 12: acquisition by Pechiney Capsules, a Pechiney subsidiary specialized in capping and overcapping for fine wines, spirits, champagne and cordials, of the Chilean company ENOCAP, a leader in the Chilean overcapping market. This transaction allows the Group to develop in Chile, a country with high quality wines that are gaining worldmarket share.

• July 7: launch by the Alcan Group of an unsolicited takeover bid for Pechiney. At its July 8 meeting, Pechiney’s Board of Directors declared that the proposed bid was uncertain, since it was subordinated to the Phase I approval of the European Commission, thereby creating a situation that is contrary to the interests of the company and its employees, industrial partners and shareholders. It then alerted the Group’s shareholders that the price proposed by Alcan is grossly insufficient given the company’s industrial, technological and immaterial assets, and that it in no way reflects its strategic value.
• July 9: acquisition by Pechiney of the entire equity interest of the financial partners of Aluminium Dunkerque. This agreement finalized the negotiations conducted in the first half of the year with the financial partners in order to anticipate the exercise of sale options that they had been granted in June 1990. This transaction will increase the Group’s attributable aluminum capacity by approximately 17%.

In the Primary Aluminum market, the latest estimates of the balance between supply and demand show a significant revision of the data for 2002. With a world demand higher than estimated, with an increase of 6.9%, and a level of production that was slightly below previous estimates, the excess supply of primary aluminum vis-à-vis demand in 2002 can now be estimated at approximately 320,000 metric tons, instead of the almost 800,000 metric tons previously reported. In 2003, the planned increases in production capacity should be scaled back by pressure on the spot market price of alumina, while demand remains strong, boosted in particular by the consumption of aluminum in China, up 29% in the first five months of 2003.

In the Aluminum Conversion markets, Pechiney’s European activities benefit from the upturn in shipments to Airbus after inventory depletion in 2002. Conversely, markets for extrusions in Europe and for standard rolled products in the United States remain depressed.

In Packaging, the trend in markets linked to food products remains steady, whereas the beauty market remains depressed without sign of a recovery.

In addition, the main external factors that influence Pechiney’s results seem to have hit a low point in the second quarter in several areas:

• the fall of the US dollar seems to have been stopped and for the first time in a year, the dollar’s current exchange rate is at a slightly higher level than the average recorded in the previous quarter;
  
• the price of aluminum on the LME showed good resistance at a level of approximately 1,400 US dollars per metric ton and fears of a decrease in the price of aluminum seem to be on the wane;
  
• the rise in the price of plastic resins marked a high point in the second quarter, since prices have since decreased twice, once in May and again in June.

Primary Aluminum (Aluminum Metal, Bauxite – Alumina and Ferroalloys)

Good operating performance and stabilization of external factors

At €37 million, earnings from operations in the second quarter of 2003, were down €5 million from the previous quarter, and down €56 million from the second quarter of 2002.

This decline was mainly due to the depreciation of the US dollar, whose parity realized vis-à-vis the euro fell 23%, from 0.90 to 1.11 US dollars for 1 euro since the second quarter of 2002. This negative trend has, however, recently stabilized. This occurred in an environment in which the price of aluminum remained not very high, at a level slightly less than 1,400 US dollars per metric ton, in expectation of signs of a world economic recovery and of a reduction in the excess supply of aluminum.

In this difficult environment, the sector reported very good manufacturing performance in the second quarter at almost all its production facilities, with the exception of PNL’s Dutch smelter, whose difficulties should be resolved by the end of 2003.

The project to build the first smelter using AP50 technology in South Africa is also being actively pursued in order to finalize the project’s shareholding base.

Aluminum Conversion

Upturn in shipments to the aerospace sector confirmed, good operational performance of European facilities, slight decrease in demand in Europe and reduced losses in the United States

In the second quarter, with earnings from operations of €14 million, the Aluminum Conversion sector confirmed the recovery reported in the first quarter which generated €15 million, versus €9 million in the second quarter of 2002.

European activities ensured earnings from operations of €21 million, compared with €24 million in the second quarter of 2002.

The increase in aerospace shipments was thus confirmed. After a 15% rise in the first quarter, the Issoire facility reported 29% growth in shipments to aerospace in Europe compared with the second quarter of 2002, in part owing to the first shipments of parts for the assembly of Airbus A380 aircraft.

However, the environment remains depressed in extrusions and foil and thin foil.

In the United States (Ravenswood, Vernon and Aluminum Lithium), the operating loss totaled €7 million in the second quarter of 2003, a definite improvement over the first quarter of 2003 (loss of €11 million) and the second quarter of 2002 (loss of €15 million). The reorganization of Aluminum Lithium activities made it possible to offset somewhat the difficulties at Ravenswood, where improved operating performance has been slowed by the continued depressed economic environment in the United States.

Packaging

A fast pace of cost reductions in the second quarter and the start of a decline in the price of resins after a high point during the period

Earnings from operations in Packaging totaled €26 million, stable compared with the previous quarter and down from the second quarter of 2002.

The sector reported good performances with regard to the Pechiney Continuous Improvement System, and managed to reduce its costs despite cost overruns of plans being shut down.

In the second quarter, the sector continued to suffer from a strong price/raw materials scissors effect and the depreciation of the US dollar vis-à-vis the euro, a movement that accelerated in comparison with the first quarter.

The sector also announced the signing of an agreement to acquire Novacel, the Mexican leader in specialty flexible packaging. This transaction creates major growth opportunities for Pechiney in both the Mexican and American markets. This acquisition, like the creation of Techpack Asia, illustrates the strategy that aims to expand in new markets and optimize labor costs.

In the second half, the sector should benefit from the impact of these acquisitions, the progressive recovery of activities currently being restructured and the recent trend to lower resin prices.

International Trade

At €14 million, earnings from operations in International Trade were in line with the figure reported in the first quarter, as the good performance of trading activities offset the negative influence of the US dollar.

Other statement of income items

Income from operations totaled €50 million in the second quarter of 2003, versus €83 million in the second quarter of 2002 and €12 million in the first quarter of 2003. This figure included €17 million of Restructuring expense and Other (expense) income.
Net financial expense totaled €13 million in the second quarter of 2003, up slightly from the second quarter of 2002 and from the previous quarter.

Current and deferred income taxes represented a charge of €20 million in the second quarter of 2003, versus €31 million in the same period in 2002. The high effective tax rate during the quarter is owed to the impact on differed taxes of the USD/AUD parity evolution.

Amortization of goodwill

The Group continues the regular amortization of its goodwill on the basis of French accounting standards. A charge of €7 million was recorded in the second quarter of 2003.

Cash flow

The cash flow generated by operations totaled €268 million in the first half of the year. Net of investments and divestitures, the Group's cash flow was a negative €38 million, before €87 million of dividends paid.

Financial structure

As of June 30, 2003, net indebtedness totaled €1,526 million, up €89 million from December 31, 2002. Compared with shareholders' equity and minority interests of €3,024 million, the debt-to-equity ratio was 0.50, compared with 0.45 as of December 31, 2002.
As of June 30, 2003, the total number of outstanding shares was 82,622,783 of which 4,767,044 were owned by the Company.

PECHINEY
7, place du Chancelier Adenauer
75116 Paris
e-mail: Pechiney-IR-Team@pechiney.com
Internet: http://www.pechiney.com

The accounting principles applied by the Group in the preparation of its financial statements differ in certain points from generally accepted accounting principles in the United States (US GAAP). The impact of these differences is presented in the accompanying tables.

Accounting for derivatives and hedging operations

Pechiney's US GAAP financial statements reflect the application of SFAS 133, which requires that derivative instruments (foreign exchange, interest rates, commodities) be recognized in the balance sheet at fair value, and sets criteria to define transactions that may be accounted for as hedging operations.

On the basis of these criteria, certain hedging operations, although efficient from an economic point of view, are not recognized as hedging activities. As a result, gains and losses due to the mark to market of certain hedging instruments are recorded in net income or in equity, with no recognition of the inverse effect of the mark to market of the hedged items. For this reason, the impact of this standard on results varies according to market conditions and is difficult to forecast. The application of SFAS 133 generated a net accounting gain (with no impact on cash flow) of € 5 million in the second quarter of 2003.

Amortisation of goodwill

In Pechiney's US GAAP financial statements reflect the application of SFAS 142, which requires that goodwill be not amortised on a recurring basis, but be regularly tested for impairment, leading, if necessary to non-recurring amortisation.The application of SFAS 142 led to the cancellation of recurring amortisation in the second quarter of 2003.

Cumulative effect of initially applying SFAS 143

In Pechiney's US GAAP financial statements and French GAAP financial statements, the accounting standard SFAS 143, “Accounting for asset retirement obligation”, was adopted during the second quarter of 2003, effective January 1, 2003. In the US GAAP financial statements, the cumulative effect adjustment at January 1, 2003 is presented on a specific line, at the bottom of the statement of income for the first quarter of 2003. In the French GAAP financial statements, the cumulative effect adjustment is directly recognized in equity.

SFAS 143 requires that legal obligations associated with the retirement of long-lived assets and resulting from normal activities be recognized as liabilities, at fair value, when incurred. These asset retirement costs are capitalized by increasing the carrying amount of the related asset and are depreciated over the useful life of the asset. For Pechiney, the main change relates to the cost of disposal of spent pot lining of aluminum pots in operation, which is now recognized as a liability and capitalized from the time the lining is placed into service. As a consequence, since January 1, 2003, the cost of replacing pot lining, which was previously charged to income, has also been capitalized and depreciated over the useful life of the lining, including for pots in operation at January 1, 2003.

The cumulative effect at January 1, 2003 is an increase of net property plant and equipment, environmental reserves and minority interest by respectively 90, 30 and 3 million euros and a decrease of net deferred tax assets by 21 million euros resulting in a positive net effect of € 36 million. The effect of the change on the results for the first quarter of 2003 is a decrease of Earnings from operations of the Primary Aluminum sector by €1 million and an improvement of Net income before cumulative effect of accounting change by € 1 million. The effect of the change on the second quarter is a decrease of Earnings from operations by € 1 million and a decrease of Net income by € 1 million.

Balance-sheet – The differences in the balance sheet as of June 30, 2003 included the impacts of SFAS 133, SFAS 142 and SFAS 87 (reduction in shareholders' equity due to the different way complementary retirement provisions are recorded in US and in French GAAP). These differences amounted to a net reduction in shareholders’ equity of € 57 million as of June 30, 2003 in US GAAP, down from € 105 million as of December 31, 2002.