It could take up to 18 months before production levels of Scotch whisky are back on track with current consumer demand, according to a new report by whisky analyst Alan Gray.

And with predictions that Scotch whisky consumption will grow by only 1.8% over the next five years, the report is calling for malt output to be cut by at least a further 8% and grain output by 5% this year.

Commenting on the report, Alan Gray of Ing Barings Charterhouse, Edinburgh said: "In 1998 the Far-East fell dramatically, the economic environment deteriorated substantially and as a result exports of Scotch whisky were affected and total exports to the Far East fell by about 60%."

A series of events conspired against the industry according to Gray with a slight fall in Latin America also for economic reasons, along a slight downturn in Europe due mainly to the fact that Europe was moving towards a single currency.

"All of that conspired to mean that the stock outline was too full and therefore you have got to start reducing it," he said.

"In my view the industry, despite cutting quite heavily over the last few years, still needs to reduce further. This year and probably in 2002 it needs to keep production at a low level. If it does that stocks will be in line with sensible levels," he added.

Although Scotch levels are still too high and UK sales volumes, according to Gray's report, fell by 3% in 2000, this was still a good performance the report said considering 1999 figures were strongly boosted by the Millennium, with volumes up by almost 12%.

Gray also predicts that consolidation, despite the Seagram sale last year, has not yet run its course and the industry can expect further consolidation.

"It is possible that from the fall out of Seagram that a brand maybe disposed of along with individual brands being sold off and possibly further amalgamation and takeovers. But who knows these things have a habit of happening when you least expect them," he added.

But with or without further consolidation, the outlook for the industry remains positive according to the report: "With the emergence of new forces in the industry such as Bacardi and Pernod-Ricard, linked to a more focused approach to Scotch brands by the industry leaders, Diageo and Allied, should enable the improved performance of the past two years to be maintained.