On the one hand, there has been the Alcan-Pechiney-Algroup forming a $20 billion plus A.P.A. group, poised to become numero uno in the aluminium industry. On the other, in a knee-jerk reaction the largest aluminium company Alcoa of USA has joined hands with US-based Reynolds to form an even larger conglomerate wresting back the number one slot. For a moment it appears that the majors are fighting for ATP points on the tennis circuit.

The mergers have thrown up two giant conglomerates and even the third largest company now, Billiton, will have to look over its shoulder even while trying to consolidate its position. There also seems a reversal of trend in the structure of the aluminium industry. Prior to 1989, the top six companies in the world combined to control 90 per cent of world aluminium capacity. However, on the eve of the mergers the figure dropped to 45 per cent. Is the industry, then, going back to the days of monopolies? Why is there a sudden need to reorganise? Will the industry give birth to a cartel? What started it all in the first place?

The past
A depressed Asia was bad news for aluminium during 1998. With fewer takers for the metal, supply soon outstripped demand. Total inventories rose to almost four million tonnes. Equivalent to almost 80 days of consumption -- well above ‘normal’ levels of 50 days.

Spunky performances by the US and West European economies failed to prop up sagging offtake. By end-1998, consumption in the western world fell 0.7 per cent as against a 6 per cent growth in 1997.

Cut to 1999. With prices heading south and averaging $1,182 per tonne in March 1999 -- touching a five-year low in the process -- obituaries were being penned. A diagnosis by the Economist Intelligence Unit (EIU), earlier in the year, reckoned recovery was a long way. Perhaps, 2001.

But what most writers and analysts hadn't factored in was an intangible -- providence.

July 5 was witness to an explosion at Kaiser's plant in the US. The impact marginally skewed the demand-supply equation as one million tonne was wiped off the supply chain for at least six to seven months.

The tables turned completely when desperate aluminium CEOs flashed their trump cards. The Canadian Alcan joined hands with Pechiney of France and Algroup (Alusuisse) of Switzerland. The outcome was a $17.4 billion conglomerate in aluminium revenues alone. Large enough to pose a serious threat to the US-based numero uno Alcoa, which responded swiftly and merged with Reynolds. The union is worth $20.5 billion in aluminium revenues.

There's only one caveat though. Both are scheduled mergers and have yet to overcome the barriers set up by US anti-trust laws.

Catalysed by an explosion and a slew of mergers, aluminium prices are exhibiting signs of recovery. While the future still appears hazy, the mergers throw up a few possibilities:

n Lower costs: The three-way merger between Alcan-Pechiney-Algroup (Alusuisse) will entail a saving of more than $500 million per annum in wages alone. The benefits may be passed on to the end user. And with both Alcan and Alcoa having large idle capacities, either of them could crank up production, putting increased pressure on prices. And, with both the conglomerates evenly matched, this seems a very real possibility. At the other extreme, a price war between the evenly matched protagonists could see aluminium prices fall dramatically.

n Cartels: On the other hand, history cannot be ignored. Way back in 1994, the industry had signed an MoU to keep prices high. Following the mergers, with a fewer number of players, both monitoring of output and prices will be easier and a cartel will remain an equally distinct possibility. However, with no immediate threat of any dramatic increase in aluminium production, a scenario of falling prices appears remote.

n Consolidation: In Europe, Billiton, Norsk Hydro, Comalco, VAW and Kaiser Aluminium are likely to come under closer scrutiny as take-over targets.

Or maybe, agreed deals and joint ventures could come into vogue. Because there is a school of thought which argues that aggressive take-over bids are a bad idea. This, for the simple reason that premiums demanded by shareholders of target companies make them uneconomical.

Then there is the new Venezuelan government which is moving ahead with its plan to privatise the country's aluminium assets. The earlier government tried its hand thrice at auctioning them off. It failed. If the mechanism, price and small print are right, strong interest may well translate into purchases.

As far as India is concerned, the mergers could open up a few opportunities. With over about 65-70 per cent of alumina capacity in the hands of the two conglomerates, Indians with captive mines could get interesting offers. Moreover, as the country is rich in bauxite deposits, players like Hindalco and Nalco could make money only by exporting alumina. A hostile bid will be difficult given the equity pattern of both the companies.

n Niches: The new entities will shift their energy and focus to the high-value and specialised semis market where research & development (R&D) is necessary. Lower-end products like commercial sheets and extrusions can continue to be imported from Turkey and east Europe.

Short-term outlook
Fundamentals suggest a weak market for the rest of the year. West European economic performance will most likely be moderate and the Japanese economy is expected to remain weak.

This picture will be counteracted to some extent by improvements in several Asian countries. Positive developments in this region have caused some of the uncertainty surrounding global economy to lift and can be expected to provide support to aluminium prices in coming months. On balance, aluminium consumption should grow more briskly than in 1998, though somewhat more slowly than the 1990s' average of 2.6 per cent. The rate of supply growth is expected to accelerate from the 2.2 per cent achieved last year. While several companies have announced their intentions to curtail production, output from new projects and recovery at smelters, which experienced problems last year, will more than offset production loss due to planned cutbacks.

Prior to the recent developments, consumption of aluminium in the western world was expected to reach 19 million tonnes this year. Meanwhile, supply is projected to reach approximately 19.8 million tonnes, suggesting that western markets will be encumbered with large surpluses again.

The excess of supply will boost stocks to some 4.7 million tonnes -- a record level. The rate at which stocks increase and their absolute levels will together keep prices depressed.

It was expected that prices would average $1290 per tonne during 1999. However, analysts and business houses themselves have been forced to revise their estimates upwards following upheavals in the aluminium industry. Now, total production under the two main rival conglomerates is roughly seven million tonnes. Although the top six companies no longer corner 90 per cent of the markets as in the last decade (they account for 45 per cent), they will still have an impact on the price front as well as on the demand-supply scenario. Plus, Kaiser's one million tonne capacity has been rendered defunct till February-March of 2000. Thus, one can expect a hardening of prices even if there is no cartel-like situation. Moreover, if prices rise, the conglomerates could rekindle their own idle capacities.

Long-term outlook
Demand for aluminium over a longer term would be supported by fairly solid economic growth in both developed and emerging countries. While not expected to return to pre-crisis levels, growth in several Asian countries is expected to be relatively strong.

As the Alcan chief put it in October 1998: "Indeed, I would be so bold as to predict that, not only will this region recover, but that, as the new century unfolds, it will be the world's leading consumer of aluminium."

The outlook for the more mature economies of the US and western Europe is also good for the next ten years. Current weakness in Brazil, which has ramifications for the wider Latin American region, is expected to dissipate.

The Japanese economy, however, is expected to remain weak over the next several years. Good economic growth in some of the major industrial regions and, specifically, in emerging countries, can be expected to support aluminium demand over the forecast period.

Aluminium consumption in the western world is projected to grow at an average annual rate of 2.5-3 per cent between 2000 and 2008 and reach 24 million tonnes by 2008. It is anticipated that supply will also increase at roughly the same rate over the forecast interval -- somewhat below its long-term trend. The increase in supply will be fueled by higher smelter production, which is expected to rise by some 4 per cent over the forecast interval.

Meanwhile, net imports from the former East Bloc are expected to decline steadily as domestic aluminium consumption in that region picks up in line with improvements in economic performance.

Prior to July 1999, it was anticipated that the western world aluminium market would move into a deficit situation in the year 2000. As a result, stocks were expected to fall to about 4.5 million tonnes. However, this is still a relatively high level of stocks and, therefore, one can still expect prices to remain weak again next year, despite the change in scenario.

However, the direction of the stock change, coupled with a brighter global economic outlook, should see prices rise slightly higher next year. Additional deficits through 2005 should further drive down inventories and engender a better supply-demand balance.

Accordingly, prices are projected to rise over the next five years and subsequently stay close to an equilibrium value of about $1,540 per tonne (US 70˘/lb) in constant dollar terms. With US inflation expected to be in the 2.5-3 per cent range, annual average prices would rise from $1,312 per tonne to $1,958 per tonne (US 59˘/lb in 2000 to US 89˘/lb) in 2008 in terms of current dollars.

India
The Indian aluminium industry is a strange case of contradictions. On the one hand, it has not only rich bauxite reserves, but also the cheapest cost of production. But it produces just 500,000 tonnes of the 22 million tonnes of aluminium produced worldwide. And even with a low per capita consumption of 0.5 tpa, exports are nothing to rave about. Probably, the mega mergers would usher globalisation in the Indian aluminium industry. Globalisation, in turn, could make available more funds for expansion purposes by shifting focus to growth based export opportunities. And the Indian players could get their best chance to shed the ‘fringe player’ status.