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Aluminum… February 14, 2007

Posted by Brian Mulligan in allances, Merger.
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Since we’ve mentioned Alcoa, the aluminum giant, in class so many times I decided to do a little research of my own and this is what I discovered and it raising some interesting questions:

In current news, Alcoa has been at the forefront of a large buyout my mining companies. Alcoa is may be bought by either BH Billiton or Rio Tinto. These two firms are large mining firms that are looking to integrate the production of aluminum into their business. Why would they want to do this?

According to the The Mineral, Metal and Materials Society the demand from China is going to drive the price and demand for aluminum in the coming years. The statistics show that China will, by 2020, be the largest consumer of aluminum over the US, Japan and Canada. Of course, it may be lucrative endeavor for these two mining companies to pursue this. Here is the article from the Mineral, Metal and Materials Society on the Chinese demand for aluminum and the potential business growths and faults. The articles is named “The China Factor: Aluminum Industry Impact”

The growth is there in the aluminum industry, so if the mining company can combine production and mining together then it will be beneficial for the company to cut down on transaction costs. This could also pose a major problem with competition among both the producers and the mining companies. If these companies keep up with the pace, they will form an industry dominated by specific providers of certain minerals and metals. This may destroy any form of competition and cause prices to rise.

Cnn.com actually has articles out analyzing what may potentially happen with this need to combine a large mining company with a production company. The name of one article is “Aluminum get hot. Who’ll get bought next.”

The article analyzes the situation from the standpoint of the mining company. Although, Alcoa is the largest aluminum producers in the world; it carries along with it assets downstream such as aluminum foil production facilities that the mining companies don’t want. Cnn.com says that it may be a better bet to buy out the second largest aluminum producers from Canada, Alcan. It has less assets downstream and is cheaper.

“Alcan makes more sense. It would cost less and it has no downstream business,” Charles Bradford, an analyst with Soleil-Bradford Research said.

This raises the question of analysis. A company would have understand the transaction costs associated with each and make a decision. What you do think these two mining companies should do?

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Comments»

1. Abby - February 22, 2007

This may seem a little random, but.. is it aluminum or aluminium? This may be one of those American vs British spellings.

I think that Alcoa should choose whether to control raw material or production…. if it can do both, that’s great, but it would come close to being a monopoly.

2. K.C. - February 26, 2007

I would say that Alcoa would benefit and should peruse merging with a mining company because it would help boost Alcoa’s sales and would cut down on buying raw materials. The raw materials would be part of Alcoa and would therefore be supplied at a lower price. However, do the mining companies want to buy Alcoa and still supply to other Aluminum companies or exclusively to Alcoa.


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