By Graham Warwick & Helen Massy-Beresford
What would a tie-up between two of the world's biggest aluminium producers mean for the global aerospace industry? That is the question analysts and others in the industry have been asking themselves since US-based Alcoa announced last week that it would launch a hostile bid for its Canadian rival Alcan.
Alcan - currently number one in Europe when it comes to aerospace - says it is examining the offer from the USA's top producer, but before the wider ramifications of the deal can be assessed, the two players will have to overcome potentially major challenges in convincing anti-trust authorities that the latest step in the consolidation of metals production would not harm competition in the aerospace sector, a fear already voiced by Alcoa chief executive Alain Belda.
The $33 billion takeover would create the world's largest aluminium company. Analyst Chuck Bradford of US-based Soleil Securities is confident the deal will win approval. "I doubt they would have made the proposal if they didn't think it would," he says. But he concedes that "Boeing and Airbus would have some concerns over the combination of the two major heat-treated plate producers".
Based on 2006 figures, the combined Alcoa/Alcan company would have revenues of $54 billion and an aluminium capacity of roughly 7.5 million tonnes, leapfrogging Russia's UC Rusal to become the world's largest aluminium producer.
The deal, if it goes ahead, will be the latest in a string of purchases for Alcoa, which has made five acquisitions since 2000, including two in Russia. Alcoa's Belda says the merger will create a stronger, more diverse company "with the scale and cost structure to be competitive over the long term within a rapidly changing industry".
The deal is expected to produce annual cost savings of around $1 billion, which will increase the resources available for research and development, says Alcoa. Analysts are confident that a successful deal could lead to even more cost savings: "I think they've understated the cost savings," says Bradford.
And this could be a key benefit of a tie-up, as the aluminium producers seek to meet the challenges posed by the shift towards the use of composite materials in aircraft manufacture. The two companies' current aerospace strengths complement each other: Alcoa is the major supplier for the Airbus A380, an aircraft that has nine times the aluminium content of an A320.
Meanwhile, Alcan is the major competitor to Alcoa for the supply of aluminium alloy plate from which structural components are machined. Use of this aluminium plate is increasing. Almost all the aluminium in the 787, for example, is machined from plate instead of sheet metal. "The 787 is not a big metal user, but it is at the leading edge of technology from a metallics standpoint," says Bill Christopher, executive vice-president and director aerospace market sector at Alcoa. Boeing has already voiced concerns over whether there is enough heat-treated plate capacity available to meet aerospace demands.
However the evolution of the specific products needed by aerospace customers proceeds, both Alcoa and Alcan will need to invest heavily in research and development as the shift towards composites demands ever more high-tech solutions from metals specialists. Combining their investment resources to ensure that metals continue to play a role could be an excellent solution for both parties.
Alcoa is poised to react to the challenge of the next generation of single-aisle aircraft from Airbus and Boeing, which it expects to see around 2013-15. At stake is how much of this high-volume market aluminium will lose to composites, following the trend set by the 787. But Alcoa argues that the next-generation narrowbody will be driven by low manufacturing costs, as opposed to high performance and fuel efficiency for the widebody, and that means composites will not automatically win their way on to the aircraft. Alcoa is developing new alloys and hybrid aluminium/composite materials to compete.
In the meantime, Alcoa is forecasting aerospace demand for aluminium will continue to grow through 2011 as manufacturers ramp up production rates of existing aircraft to fulfil order backlogs.
Alcoa is also looking beyond Airbus and Boeing for future growth, and its massive jump in scale if it does manage to take over Alcan will allow it to position itself more strongly in key emerging markets.
Worldwide, Alcoa is positioning itself to supply Chinese and Russian large commercial aircraft manufacturers. The company is investing in expanding capacity in structures, fasteners and aerofoils, and in expanding globally, with lower-cost plants in China, Hungary, Mexico and Russia. The proposed purchase of Alcan could help build up Alcoa's footprint in regions such as South Africa and the Middle East where it lacks capacity.
As Alcoa seeks to build the world's biggest aluminium producer, the industry will be watching closely to see whether a deal of this magnitude, if it is allowed to proceed, will pay off. "It depends what Alcoa will have to give up," predicts Bradford.
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Source: Flight International
