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. Last Updated: 07/27/2016

Aluminum Merger Talks Eye Savings




LONDON -- Three-way talks to create the world's biggest aluminum group are a sign of mounting pressure on metal companies to join forces in the face of low prices that have sliced into profits.


Advanced talks between Switzerland's Alusuisse Lonza, Alcan of Canada and France's Pechiney are being driven specifically by fierce competition from market leader Alcoa Inc.


But analysts and bankers said the industrial logic of the three banding together - particularly in the downstream fabrication of aluminum products - held lessons for others.


"The commodities sector is still under pressure. Companies aren't going to go to the wall or close down, so consolidation makes a lot of sense," said one investment banker.


"There are a couple of other metals deals people are talking about. This is a trend that is set to continue."


The mooted tie-up follows June's merger agreement between British Steel PLC and Dutch steel and aluminum group Koninklijke Hoogoenns NV.


If the latest deal goes ahead, it would go into the record books as the first three-way cross-border intercontinental merger, creating a group with a market capitalization of some $20 billion, compared with $23 billion for Alcoa.


That promises considerable complexity in structuring the deal, settling management issues and satisfying regulators in both Europe and the United States.


But the industrial logic of the move is straightforward - to reduce production costs, increase margins and generate critical mass, especially in Europe, where Alcoa has been turning up the competitive heat following acquisitions in Italy and Spain.


Charles Kernot, analyst at Paribas in London, said the three merger candidates needed to respond to Alcoa's market dominance, which increased last year with the $3.8 billion acquisition of Alumax Inc.


"There was a need for Pechiney and Alusuisse to create an organization with critical mass and the ability to go forward. The inclusion of Alcan is good news, giving a valuable North American presence," he said.


Nick Hatch of Flemings Global Mining Group agreed.


"It would go a long way to trying to match the success we've seen from Alcoa over the last few years, both in primary production and fabrication."


With annual production capacity of primary and fabricated aluminum of roughly three million metric tons, the merged group would leapfrog Alcoa to take the world No. 1 spot - but would still only control around 14 percent of total world output.


That would give it little influence on primary metal prices, but it should have pricing power in fabricated products.