Alcoa Targets Production Ventures in Feverish Aluminum Market

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Researched by Indsutrialinfo.com (Industrial Information Resources Incorporated; Houston, Texas). Global plans to increase primary aluminum production persist in the face of warnings from the market that production is in danger of running to far ahead of market demand. In China, with the largest aluminum industry in the world, The Aluminium Corporation of China (Chalco), the country's largest primary aluminum producer, is planning to more than double the smelting capacity at its Pingguo plant from the current 135,000 tons per year to 355,000 tons per year by 2006.

This increase in production is part of a 50:50 joint venture with Alcoa (NYSE:AA), which is transferring management, operational, and technical expertise and best practice to Chalco. The plan also includes doubling the plants alumina capacity from its current 400,000 tons per year by 2003. Alcoa expects the joint venture to allow it to participate in the growth of China's aluminum market which is the fastest growing in the world. Involvement in the primary aluminum sector will also support Alcoa's further growth in fabricated products in China. The cost of the expansion is estimated at $2.16 billion.

Chalco is now marketing an initial public share offering (IPO) for 30% of the company in the $300-$500 million range with the public offer taking place in Hong Kong December 3-6. Alcoa will be taking up shares but Chinlaco (Aluminum Corp. of China, Beijing) will remain as Chalco's largest shareholder as the company works with Alcoa on its transformation into a multinational company.

China's total production of aluminum this year is set to reach 5.3 million tons, which represents a hefty increase of 24% over 2001 production. New capacity, which has been approved, to come on stream before 2005 is estimated to be 2 million tons plus another 500,000 tons which will come from small localized plants. Offsetting this production expansion is the possibility of around one million tons of capacity, using old technology, being retired. Chasing volume in a market which saw a 7% price downtrend over two years requires cost control combined with high efficiency techniques. Further complicating the aluminum industry's development environment in China are political pressures to maintain and grow jobs, which is a lumpy problem when competing with global competitors in an electricity-hungry and capital intensive industry.

Alcoa is also one of three companies who have expressed an interest in acquiring 51% of the Nigerian government's 70% stake in that country's Aluminium Smelter Company (ALSCON). The other bidders are Glencore (Baar, Switzerland) and Russian Aluminum (Moscow, Russia). The public enterprises bureau, which is supervising Nigeria's World Bank-International Monetary fund Nigerian privatization program are evaluating the expressions of interest from the three companies who will be required to supply overall technical, financial, and managerial abilities to operate and improve the plant.

Situated on the banks of the Imo River, the plant is about 16 kilometers from the Atlantic Ocean. With a production capacity rating of 193,000 tons per year of ingots and billets, it has a dedicated gas-field 540 MW power station which is fed by pipeline from one of Nigeria's richest gas fields. ALSCON, which has the status of an Export Factory, has been inactive since 1999 owing to the withdrawal of its former technical partners, insufficient working capital, and the short supply of gas for which it had not been able to negotiate a discounted rate.

Estimates based on reports from the International Aluminum Institute indicate that global primary aluminum production fell by 2.76% between 2000 and 2001 from 21.19 million tons to 20.55 million tons. Production is up 2.5% for the first three quarters of 2002 over same period in 2001 and up 5.4% for the month September 2002 over September 2001. Significantly these figures do not include output from a number of non-reporting countries which include China, both Koreas, Iran, and Poland.