According to Rio Tinto Alcan's
chief executive, aluminum is not yet out of the woods and it
may take quite a while, perhaps even a couple of years, until
inventories return to healthy levels.
A quick examination of Rio Tinto Alcan's
major markets reveals why Jacynthe Côté is wise in
her caution. The sector is heavily dependent on three major
markets-transportation, construction and packaging-none of
which has proven particularly robust this time around.
The trials and tribulations of the U.S.
automotive industry have been well reported and it is widely
recognized that it may take a number of years for automotive
build rates to return to their previous highs. Construction can
hardly be described as a safe haven, either, and orders for can
sheet-the most important part of the packaging business for
aluminum-actually fell 5 percent in March while shipments of
sheet, plate and extrusions grew.
Growing aluminum's market share in these
recently lackluster sectors is one way to limit the damage of
future downturns. At the same time, the industry needs to be on
the lookout for completely new applications that can help
aluminum retain the same relevance in the 21st Century as it
had in the latter half of the 20th Century.
In this regard, however, Rio Tinto Alcan,
as well as upstream rivals like BHP Billiton and United Co.
Rusal, will soon be dependent on its customers and integrated
competitors. When Rio Tinto Alcan finally succeeds in selling
its remaining downstream assets it will, to a large extent, be
turning over responsibility for market development to customers
such as Novelis Inc. and Aleris International Inc., as well as
to still-integrated rival Alcoa Inc.
There are good arguments in favor of
de-integration of the aluminum sector, and certainly
shareholders have shown a greater fondness in recent years for
those stocks that offer full exposure to the very fashionable,
if somewhat volatile, commodity markets.
But there can be little doubt that the
aluminum industry at large suffers when huge multinational
conglomerates like Rio Tinto step back from the front line of
product development and instead pass the mantle onto companies
that for the most part are far smaller and less
Indeed, in the recent past we have seen two
of the largest independent fabricators, rolling company Aleris
and extruder Indalex, enter bankruptcy protection-not the ideal
platform from which to promote the development of aluminum.
Novelis also experienced financial problems
in its early days, although it is now performing with some
distinction. And it is the Hindalco subsidiary, along with
Alcoa, on which much of the burden for market development
To be fair, Rio Tinto Alcan is still an
innovator at the upstream level, funneling more than $100
million a year into R&D as the company looks to reduce its
energy consumption at the smelting level and eliminate carbon
dioxide emissions, Côté told AMM.
But on the downstream level, the exit of a
major player like Rio Tinto Alcan could curb new product
It's not as if aluminum doesn't face stiff
competition. The steel industry, for example, has been resolute
in its defense of market share in the automotive sector, and
collaborative efforts by groups such as the Steel Market
Development Institute's Automotive Applications Council has
seen great advancements in ultra-lightweight steels, which
threaten the advance of aluminum in the automotive arena. And
with the generally small aluminum fabricators pitted against
international behemoths like ArcelorMittal, the aluminum
sector's voice in the ever-present push for new applications is
not always heard.
Aluminum's own giant, Alcoa, for its part,
continues to look for new avenues of growth, and consumer
electronics and aluminum-intensive solar cells are held out as
potentially significant markets for the light metal in years to
come. Alcoa hopes that as the leading light in these
developments, it will be the first to benefit.
Of course, if the likes of Alcoa and
Novelis are successful in broadening aluminum's horizons,
upstream producers like Rio Tinto Alcan will benefit, too.
Investors seem quite content with this, and probably snigger
quietly that it's great to have others put up the R&D money
from which they ultimately can reap rewards.
But if a reliance on such a small number of
well-resourced downstream companies to develop markets for
aluminum ultimately results in a loss of market share, the
entire aluminum supply chain-including shareholders in upstream