The quest for supersizing

Updated: May 26 2007, 06:24am hrs
Consolidation in the aluminum industry simply refuses to quell. With the takeover of Alcan, the third largest producer of aluminum in the world, getting hotter by the day, the current round of M&A activities in the industry is unlikely to cease just yet, say experts.

Alcoa, the second largest producer of aluminum in the world at 3.552 million tonne, is keen to acquire Alcan, which has an annual production of 3.4 million tonne. But the latter, based in Montreal, Canada, has no desire to merge with its US rival, and has urged its shareholders to reject the $27.41 billion hostile bid by Alcoa. Indeed, Alcan is now contemplating to take over Alcoa instead in a bid to stave off competition from its rival. Alcan is also said to be talking to mining major BHP-Billiton among other companies for a possible merger with them.

The consolidation in the aluminum industry, incidentally, is not a new phenomenon with most metals going through a similar phase from time to time. Consolidation, on a whole, is linked with the need to have greater size and hence control over pricing, says Hitesh Agrawal, senior analyst at Angel Broking, Mumbai. Basically with consolidation, supply rests in a few hands. Naturally, this gives those players the power to determine the flow of the product in the marketplace and the price at which it will be sold. This ability to control demand and supply is compelling enough for aluminum producers, especially, the large ones, to come together. However, with every round of consolidation, room for inorganic growth for a number of players in the industry actually comes down because there are fewer potential targets left for acquisition in the marketplace. At least in the aluminum industry this seems to be the case.

Unlike the steel industry, which is highly fragmented and large in size (production of crude steel in 2006 was 1.12 billion tonne) aluminum is a much smaller industry. Primary aluminum production in 2006 was 23.86 million tonne, according to the International Aluminum Institute, though some estimates peg the figure at 33.669 million tonne.

Consumption, meanwhile, has been steadily growing from 31.7 million tonne in 2005 to an estimated figure this year of 36.1 million tonne. This surge has been on account of the boom in demand for aluminum in countries such as China. In such a scenario, where demand is growing, it makes good sense for a player or group of players to be in control of things on the supply side.

But, when consolidation kicks off in an industry small in size, the ramifications are far and wide. Aluminum, in reality, is fairly consolidated, with the top 4 players alone accounting for 53.44% of the total production. The trigger for the current round of consolidation, say experts, was the coming together of Russian companies Rusal and Sual and Swiss maker Glencore in November last year. This merger created the largest aluminum company in the world called United Company Rusal, with an annual production of 4 million tonne. Alcoa, which was the largest aluminum producer till then, was pushed to second place.

Naturally, the changed global equation was not something that Alcoa wanted, especially not in a scenario, where the company was vulnerable for takeover by rivals as well as allied metal and mining majors such as BHP-Billiton and Rio Tinto, on account of the slip in position. In todays context, its hard to determine who will make a bid for whom, says Gilbert Lobo, a Mumbai-based metals analyst and columnist. In such a situation, joining hands with its former Canadian subsidiary Alcan made sense to Alcoa. The hostile bid on May 7, 2007 came following a breakdown in talks between the two for a friendly merger.

In whichever direction the Alcan-Alcoa merger goes, there is no denying that consolidation, especially, in the primary aluminum space, will leave little room for players wanting to dig their heels deeper in the segment inorganically. The prospects for inorganic growth at the primary aluminum level are limited because there are few players and the consolidation is fairly intense, says Ashutosh Satsangi, head of research, Crisil. Fragmentation is less at the primary aluminum level. So opportunities are limited, says Chandresh Ruparel, director, N M Rothschild & Sons (India).

Where the opportunity for mergers & acquisitions does exist is down the value chain. Here there are a number of players, especially, in areas such as aluminum foils, which leaves room for companies wanting to scale up inorganically. In fact, D Muthukumaran, vice-president, strategic initiatives, Aditya Birla Group, which controls Hindalco, a key aluminum and copper player in India, argues that the current consolidation is likely to throw up some M&A opportunities in the specialised products domain on account of anti-trust, business and competitive reasons. You could see the sale of some demerged businesses as a result of the consolidation between companies, he says. For instance, Alcoas chairman and chief executive Alain Belda has said that he is prepared to divest Alcans packaging business if the latter merges with it. Of course, that is only likely if the two merge, which seems off-the-mark at the moment.

Hindalco, in contrast, did manage to acquire a demerged global asset in Novelis in February this year. The latter, a subsidiary of Alcan, was spun-off into a separate unit following the merger between Alcan and Pechiney in 2003.

For Hindalco, it made perfect sense to acquire Novelis because it gave it immediate access to its rolling and can recycling facilities. The US is a big market for cans, and Novelis has some fixed contracts going with companies such as Coca-Cola for their production. Hindalco will now be able to control these operations, not to mention a straight addition of 3 million or 30 lakh tonne to its existing rolled products portfolio of 2.1 lakh tonne with the acquisition.

In fact, companies such as Hindalco, and even Vedanta, to a certain extent, are keenly watching how the current round of consolidation will eventually pan out. I dont think that aluminum is completely consolidated yet. There are a number of small players that are potential targets, says Muthukumaran. Tarun Jain, director, Bharat Aluminum Company Ltd (BALCO) and Madras Aluminum Company Ltd (MALCO), both of the Vedanta group, articulates a similar point of view, In the medium term, we have charted out an organic growth plan for our aluminum business. But in the long-term, who knows If an opportunity for an acquisition arises then we may consider it.