Something to think about:" Jul 17, 2007Alcan is too expensive...

Something to think about:
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Jul 17, 2007
Alcan is too expensive company for a mining company, even if it is bought by world’s No 2. I am convinced Rio Tinto had much more intelligent solutions for the amount of the money.
Moreover, new Rio Tinto will remain the second biggest mining company in terms of market value (after BHP Billiton), second in bauxite production (after Alcoa), fourth in alumina production (after Alcoa – AWAC, UC Rusal, Chalco) and probably second in primary aluminium production – Rio Tinto and Alcan will both produce some 4.25 million tonnes in this year, while production of UC Rusal will most likely reach 4.3 million tonnes in 2007.Alcoa could also easily interfere in the race to remain No1 in aluminium production by 2008.
Rio Tinto is obviously bullish in aluminium price outlook in next ten years, citing strong aluminium demand, especially in China. I just hope that Rio Tinto's experts know that aluminium price depends on many things, not just demand in certain area since production there is also rapidly increasing. That is why I believe Rio Tinto's strategists were more bullish on bauxite and alumina demand in following years, not just primary aluminium. This is why I expect not only packaging, but also some other assets will come on list for sale as soon as market conditions deteriorate, maybe much sooner than Rio Tinto expects.

I am positive Alcoa - Alcan deal (prevailingly aluminium company) would be much more beneficial for all employees in Alcan, except for the top management. The most surpassing thing of all in this deal is, besides excellent (over all expectations) bidding price (US$ 38.1 billion) the fact that the new company named Rio Tinto Alcan would be based in Montreal, Canada, directed by Alcan’s Chief Executive D Evans!? Too generous for a company trying to fend off the rival’s bid, and fighting to survive, indeed!
Finally, if we exclude only the price, the question is: why would it be more convenient for Alcan to be bought by Rio Tinto, or someone else, instead of Alcoa? The cash money is good reason, but what will happen when workers start losing their jobs?

After Alcan eliminated two major players, Alusuisse-Lonza (Algroup) of Switzerland in 2000, and French Pechiney in 2003 (did not try to retain Pechiney name then), it appeared that the company had an excellent opportunity to assume the mantle of a leader amongst aluminium producers. Instead of gaining self-confidence by purchasing the heart of the European aluminium industry, it would seem that Alcan’s strategists simply did not have enough courage to press ahead.
By analysing Alcan’s business moves over the last several years, especially the take over of Pechiney, followed by the spin-off of the majority of its rolling mills (Novelis in 2005), the sale of Aluminium de Gréce in 2005, and the delay of several smelter projects around the world (notably Coega in South Africa), it could be concluded that Pechiney was still too big a gulp to swallow. The whole strategy of Alcan was obviously based on a much lower LME price than is currently the case. The main accent was to be placed on efficiency, lowering production costs and survival under poor market conditions. However, as in real life, survival often depends on how big and strong an organisation is, not its ability to persist under poor conditions.

Another question which might be posed is how much are huge aluminium assets attractive, currently, to diversified companies such as BHP Billiton and Rio Tinto? If they made a bid, they would definitely have to switch their strategies in relation to aluminium. Would they really do so — and why should they?
The fact that Alcoa was counting on savings of US $ 1 billion on synergies, in the third year after purchasing Alcan, could also be taken as proof that Alcoa also expects the price of aluminium to remain at record highs in the years to come. Obviously, this expectation was the main cause for both Alcoa and Rio Tinto to make a bid for Alcan.
Rio Tinto Alcan would benefit from Alcan’s supply of very cheap electricity, sourced from Quebec’s vast reserves of hydro-electric power. So the strategy of the new company could be assumed in following: huge profits in mining sector (bauxite and alumina), no risk in primary aluminium sector and the downstream may be sold one by one, starting from packaging (accordingly of a value of US$ 5-6 billion).

The time has arrived when the aluminium market has come to be dominated by major players, who are definitely in the position to create monopolies. Such companies may find it easier to influence government decisions, both at home and abroad; obtain favourable bank loans and other benefits, and find it possible to influence price movements. It might be presumed that this may also result in the stabilisation of aluminium prices, avoiding large oscillations over a longer period, and above historic averages. This is because both Alcoa and United Company RUSAL based their long-term strategies on high aluminium prices. The same is now doing Rio Tinto. So they may even start to negotiate price trends among themselves in near future. A possible consequence might be that few top producers, in a few years time, might come to the point that, whilst increasing capacities, they might decrease production in order to keep the price high. Otherwise, in the longer term, consolidation within the aluminium industry, coupled with the race for first place, may result in over-capacity / production, market surpluses, and, as a result, lower prices, especially if this coincides with a global economic slowdown.
In my opinion, this is the reason why it would not be a surprise to see ‘’Aluminium Cartels’’ to be formed in near future, where production and price would be influenced /regulated by major producers, similar as OPEC does in the oil market.
The size and organisation of the new company, Rio Tinto Alcan, will be such that it is questionable whether it can be efficient enough in all its segments to be able to continue to pursue the path of sustainable development - or will it start to suffocate itself? Larger organisations are definitely stiffer, tending to react slower, and requiring more time to accept new ideas and to adapt to new conditions.
Finally, the new Rio Tinto, which is already diversified in many areas and business activities, will have too switch its strategy towards aluminium business. If the opposite occurs, I expect the merger would lead to stagnation and loss of momentum within the company’s aluminium division.

Then, as soon as the price of aluminium fell below its historical average, the new giant mining company, whether it is Rio Tinto - Alcan, or maybe BHP Billiton -Alcoa in future, would start to spin off parts of its aluminium businesses, from which might arise some new Pechiney, Alcan or Alcoa ….. enabling the wheel of history to continue to roll.
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