Alcoa Inc. lost its place as the world's largest aluminum producer

Alcoa Inc. lost its place as the world's largest aluminum producer and may sink to third unless Chief Executive Officer Alain Belda is successful in the $27.7 billion hostile takeover of Alcan Inc.

The acquisition of Montreal-based Alcan would double Alcoa's output after prices of the metal doubled in the past five years. Alcoa's lead fell to Russia's OAO Russian Aluminium in March, and Aluminum Corp. of China Ltd. plans to overtake Alcoa within three years.

Buying Alcan would give Belda, 64, control of about 20 percent of the global aluminum market, greater pricing power over customers such as Boeing Co. and more resources to compete for projects from Iceland to Australia. Belda has spent the last 34 years at New York-based Alcoa, where second-quarter profit probably fell because of production shortfalls at two U.S. plants.

``There's definitely a school of thought that says bigger is better so you have more control over resources and pricing,'' said Peter Klein, who helps oversee $21 billion at Fifth Third Asset Management in Cleveland, including Alcoa shares. ``Alcoa needs more overseas assets and exposure and Alcan would give them this. Maybe the world is ready for this kind of company.''

Alcoa is scheduled to report second-quarter earnings after the market closes today. Profit excluding some items probably was 80 cents per share, according to estimates compiled by Bloomberg, compared with income on that basis of 86 cents a year earlier. Production losses at two U.S. smelters hurt net income, according to Credit Suisse analysts including David Gagliano, who forecast earnings of 75 cents a share.

May Raise Offer

Alcoa shares rose an average 9 percent a year for the past five years, compared with a 17 percent increase at Alcan and 64 percent at Chalco in Hong Kong. The stock gained 39 percent this year to $41.66 on the New York Stock Exchange on speculation the company will become a takeover target if the takeover of Alcan falls through.

Belda, who's said he may increase the $75.64 per share offer for Alcan, wants access to the company's 3.5 million tons of aluminum capacity, lower power costs and metals projects in countries from Saudi Arabia to Australia. Alcoa shipped 3.5 million tons of aluminum in 2006, up 1.6 percent from a year earlier.

``Given the growth of increasingly formidable competitors around the world, a combination of Alcoa and Alcan will be well- positioned to compete in the global aluminum market,'' Belda said in a July 6 statement. Morocco-born Belda, who became chairman and chief executive in 2001, earned $3.78 million in 2006, according to data compiled by Bloomberg.

Taking Market Share

Alcoa's competitors are taking market share. Chalco is accelerating plans for domestic acquisitions to boost output to 5 million tons by 2010 from about 3.5 million tons this year, while United Co. Rusal plans to boost output 60 percent to 6.4 million tons in 2013.

Rising demand for aluminum will require the equivalent of about 80 new smelters of new capacity, according to Alcoa. Manufacturing facilities are closing in Europe and North America because of rising energy costs and shifting production to countries such as Iceland, which offer cheaper power.

Aluminum prices are little changed this year at $2,812 a metric ton on the London Metal Exchange.

Competition for access to new smelting sites is increasing. Greenland chose Alcoa over Norsk Hydro ASA earlier this year to build an aluminum smelter and as many as four hydroelectric plants because the U.S. company's plans were more ambitious than its rival, according to a June 6 report on Norway's NRK Radio that cited Peter Hansen, a director at Greenland's industry ministry.

Cheaper Power

``I know that the Russian companies would love smelting and alumina assets outside Russia,'' said Charles Bradford, an analyst at Soleil Securities in New York. ``The changed global aluminum landscape makes a deal between Alcoa and Alcan possible.''

Buying Alcan will also reduce Alcoa's need to scour the globe for cheaper power since it will benefit from subsidized electricity and water rights from the Quebec government. The Montreal Economic Institute, a non-partisan think tank, estimates the advantages will cost the province about C$2.7 billion ($2.6 billion).

Aluminum production lagged behind demand by 62,000 metric tons in the first four months of this year, the World Bureau of Metal Statistics said in a June 20 report. Global consumption during the period was about 12.2 million tons.

More Bids

China, the world's largest consumer of aluminum, is expected to increase demand to at least 20 kilograms (44 pounds) a person from 8.5 kilograms because of the country's expanding industrialization, Alcan Chief Financial Officer Michael Hanley said Feb. 22.

Alcan shares rose C$1.08, or 1.2 percent, to C$90.90 on the Toronto Stock Exchange on July 6. That's 20 percent more than Alcoa's $75.68 stock and cash bid. Investors speculate that companies such as BHP Billiton Ltd. and Rio Tinto Plc may also be interested in acquiring Alcan.

``The downside is mitigated by the current Alcoa bid and there is potential upside as a result of the various scenarios,'' such as a competing offer, said Lawrence Smith, an analyst at Scotia Capital in Toronto who said the company may finally be sold for as much as $100 a share.

source:bloomberg.com