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Aluminum is down . . . but don’t count it out

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If the boom in commodity prices has been a home run for most metal producers, it's fair to say aluminum is stuck kicking dust on second base.

Certainly, the commodities bull market has been good for aluminum at around $3,000 a tonne, prices are more than double what they were five years ago. But the increase is far less than that recorded by other base metals, and with domestic demand suffering due to the economic slowdown, the chances of a big spike in prices seem to be limited.

At the same time, a game-winning play has yet to be made on the merger-and-acquisition front. After Rio Tinto pushed Alcoa aside to snatch up Canada's Alcan Inc. in 2006, there's been relatively little action. BHP Billiton's audacious bid for Rio continues to rumble on, but has faded from the headlines as Rio's shareholders dig in for a protracted battle.

While the aluminum markets may not sport the star power of an Alex Rodriguez or a Manny Ramirez, there's still plenty of strength behind the scenes. In addition to the market pressures and increasing de-alignment of the U.S. and global markets identified in our cover story (page 28), both of North America's traditional aluminum superpowers are facing interesting times.

Alcan, or Rio Tinto Alcan as it is now known, continues to attract attention. If Rio does manage to maintain its independence, it's pretty clear that at some point it will look to dispose of the downstream businesses that Alcan retained when it spun off Novelis. And that could be a battle worth watching. It seems that Rio's preference might be to sell the business in one piece, which would complicate matters considerably unless a major financial player is willing to step up to the plate—something deemed less likely now than before the credit crunch roiled the financial markets.

At the same time, there are not as many potential industry suitors as there once were. There's been speculation that Alcoa's recent decision to team with Aluminum Corp. of China to take a stake in Rio is a sly attempt by the Pittsburgh-based company to get its hands on some or all of Alcan's assets. But there are parts of the Alcan group that might be off-limits to Alcoa for antitrust reasons.

Likely suitors, other than Alcoa, are limited. Novelis, now owned by India's Hindalco, might be tempted. And, of course, Novelis executives who came up through the Alcan ranks know the business well. But Alcan's downstream business in its entirety might be too much for the Atlanta-based company to swallow.

Similarly, Aleris, which has been perhaps the most acquisitive company in the downstream aluminum sector, also might find the package too large to swallow, especially since it seems to be having a little trouble digesting all its recent purchases.

With the major primary producers focused on upstream operations, the pool of potential buyers for a downstream business as substantial as that of Alcan's is limited. Perhaps the Chinese would be interested, but Beijing's focus when buying overseas generally has been to secure raw material supplies. So if and when Rio does sell, a break-up of Alcan's downstream assets appears to be the most likely option.

Alcan's aerospace holdings—notably the Ravenswood mill in West Virginia and the Issoire operation in France—are the big prizes right now, given that aerospace is one of the few aluminum markets in robust health. But Alcoa's leading position in that sector might make such an acquisition difficult, even if major consumers, like Boeing and Airbus, would no doubt prefer those assets remain in the hands of a trusted industry player.

Kaiser Aluminum has risen somewhat Phoenix-like from the ashes on the back of the buoyant aerospace market, and the company would certainly have some interest. Kaiser also has intimate knowledge of Ravenswood, which it once owned.

Rio apparently has not started shopping the assets yet. But once it does, Alcan's name could be back on the front pages for a while.

On the global stage, Alcoa's name has come under fire in recent months over the lawsuit filed against it and some of its employees by Aluminium Bahrain. The allegations of bribery against Alcoa sent shockwaves through the industry, but the reaction following the initial surprise has been equally interesting. While most agree that the price Alcoa derived via its aluminum deal with Alba—around 16 percent of the LME—seems generous, the general perception on Wall Street and even within the industry seems to be that it is unlikely the charges against Alcoa will stick.

Perhaps, for once, the company's button-down reputation has protected it from suspicion. This, after all, is a corporation that, following the scandal of the MoU in the 1990s, rarely seems to step too far without a lawyer by its side.

With the Justice Department now involved, the case likely will run on and on. And by the time it's resolved, Alcoa will probably have a new chief executive. The exact timing of Alain Belda's retirement remains a closely guarded secret, if indeed anyone other than Belda knows at this stage. Most are betting that Belda will step aside sometime in the summer after an eventful tenure during which he seemed forever under fire for one reason or another, and most often simply for not being Paul O'Neill (Alcoa's former chief executive, not the ex-Yankees slugger).

So while aluminum might appear to be playing second fiddle to the fun and games occurring in other markets right now, it's unlikely to stay in the minor leagues for long. And while Alcoa and Alcan aren't the dominant forces they once were, it's likely they'll continue to make headlines for some time yet.

David Brooks

Senior vice president


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