Metal Merger Mania

February, 2007 (Source)

Whether or not BHP Billiton or Rio Tinto buys Alcoa for $40 billion, as the stock market rumor machine has it, a deal of that scale in the metals industry is a question of when, not if. A tie-up with either BHP Billiton or Rio Tinto would give Alcoa access to millions of tons of bauxite and alumina, the mineral used in making aluminum. The benefit in the opposite direction is that 70% of Alcoa’s revenue comes from its downstream business rather than from basic production of the metal and mining–just as oil companies have found it cheaper to buy reserves that other companies have found rather than explore for it themselves, especially when it is in cheap-to-extract places.
It is the same rationale that drove the Rusal-Sual-Glencore merger last year: Rusal has access to cheap hydropower (a third of the cost of aluminum is accounted for by the electricity used to smelt it), Sual has bauxite, and the Swiss company has downstream operations.
For its part, Alcoa was relegated from first- to second-largest aluminum producer by the Rusal-Sual-Glencore merger. A deal with either BHP Billiton or Rio Tinto would be needed restore it to first place.