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Aluminum Prices Should Hold Steady

September 5, 1999

PITTSBURGH (AP) _ Consumers take note: the pending merger between Alcoa Inc. and Reynolds Metals Inc. should have little effect on the price and availability of Reynolds Wrap, that versatile foil used to wrap everything from baked potatoes to grilled fish filets.

Nor will the merger between Alcoa, the world’s biggest aluminum maker, and Reynolds, which is No. 3, affect the supply or price of fancy car wheels, engine blocks or cans for food and beverages.

Even figuring in the other big aluminum merger, Zurich-based Alusuisse-Lonza (Algroup), Pechiney of France and Alcan Aluminum of Canada, there’s little danger of aluminum prices spiking up, as might be expected when suppliers combine.

The Alcan-Pechiney-Algroup combination will command about $21.6 billion in revenue, compared to the Alcoa-Reynolds grouping’s approximately $21 billion. Together the two groups will control about 25 percent to 30 percent of world ’s aluminum production, said Robin Adams, president of Resource Strategies in suburban Philadelphia.

``The first thing that will happen is prices will go down for consumers as these big giants slug it out for market share in the big markets. And that’s probably why we won’t have a lot of consumers screaming about this in the short term,″ said Jim Southwood a consultant with Pittsburgh-based Commodity Metals Management.

Over a longer period of time, say five years, Southwood thinks aluminum prices could well rise a bit, but not enough to affect consumers.

``Once you’ve established market share, you want profits. But the limit on that is competing materials,″ Southwood said.

New plastics, carbon fibers and other metal alloys all conspire to mute any desire of the huge aluminum companies to operate as traditional monopolies, setting prices as they wish and limiting supply to suit their bottom line.

Because there are other materials to choose from, the General Motors Co., which recently completed a 10-year deal with Alcan to ensure stable prices and supply of aluminum, is not worried about the merger.

``The automotive industry is increasing the use of aluminum in vehicles based on the expectations that aluminum will remain competitive with other materials. As long as this is recognized by the merging companies, the merger may be a good thing for the industry,″ said John Stiles, a GM purchasing manager for metal products.

Besides competing materials, the aluminum companies would have another big problem if they tried to use their market muscle to fix higher prices: the price of bauxite, the base material from which alumina comes, has changed little over the years.

Higher prices would just encourage other aluminum suppliers to enter the market, analysts said.

``The entire continent of Australia is bauxite. They just started 50 years ago mining in the western part of Australia,″ Southwood said. ``You could mine all the way across the continent _ it would be 500 years before they would mine it out.″

Flat raw materials prices have spurred merger talks in the copper industry as well. Since the price of the basic commodity is not rising, companies can increase profits one of two ways: cut costs or develop new products.

Metals producer Phelps Dodge Corp. is trying to horn on a merger between leading copper producers Cyprus Amax Minerals Co. and Asarco Inc., offering both $2.7 billion to form a three-way grouping.

A merger cuts costs by eliminating redundant workers.

``You don’t need two treasurers; you don’t need two marketing guys serving the auto industry,″ New York-based metals analyst Chuck Bradford said.

Alcoa also is going the new product route, developing with Audi an all-aluminum car, from the frame through the engine to the body panels, as well. Last week, Alcoa agreed to buy the Golden Aluminum Co. for $41 million, mainly to continue developing the firm’s continuous casting technology for aluminum.

``I look at that as more of an R&D process than an acquisition,″ Bradford said.

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