From May till July, the international community watched with interest the attempts of the Russian giant Severstal to achieve global leadership. Those attempts failed, but now Russia has again engaged everyone's attention. This time the agitation is caused by Russian non-ferrous metals producers, Siberia-Urals Aluminum Company (SUAl) and Russian Aluminum (RusAl). Their potential merger would create the world's largest aluminum producer. If this happens, U.S. Alcoa and Canadian Alcan will no longer be leaders. Several popular publications worldwide have reported on this possibility.
The merger would certainly make sense. Global aluminum consumption is projected to double over the next 20 years. To be able to survive in the tough international competition, Russia's largest producers may merge. If this happens, RusAl will control 75% of the merged company and SUAl 25%, according to some sources. In absolute figures, both companies have already made it to the world's top ten of aluminum producers: RusAl's annual output is 2.7 million tons of primary aluminum and SUAl's 1.05 million tons. Consequently, after the potential merger, their aggregate output will exceed that of the world's other leading producers, Alcan (3.5 million tons) and Alcoa (3.4 million tons). The new company's capitalization will be close to $20 billion.
This would be more than a welcome development for the Russian steel industry. Leadership on the aluminum market will allow Russian companies to influence the price of commodities and finished products. In reality, however, the merger is far from decided. There has been no official confirmation yet, although rumors have been circulating for the past two years.
Still, there is no smoke without fire. The merger seems logical business-wise. RusAl accounts for 75% of Russia's aluminum output and for 10% of the world's production. It exports its products to 50 countries. However, it has always suffered from a lack of raw materials. SUAl, on the contrary, has ample raw materials. Its plants annually produce about 5.4 million tons of bauxites (90% of Russia's output) and 2.3 million tons of alumina (60%). It also has finished products manufacturers. But this giant concern has so far failed to take full advantage of its potential.
Formally, RusAl may resolve all its commodities problems with the help of SUAl and simultaneously help the latter to improve sales. At present, RusAl's companies can provide themselves with only 60% of necessary raw materials. However, they have been successful finding raw materials abroad, where they buy out mining facilities, thus eliminating the obvious reason for the merger with SUAl.
Nevertheless, it looks as if the Russian government has decided that the merger would benefit the country. A few years ago the Russian antitrust watchdog announced that Russia exported 80% of primary aluminum, but imported two thirds of the necessary amount of bauxites. Prices on the global aluminum market are controlled by two leaders, Alcoa and Alcan. This suggests that Russia should focus on eliminating its raw materials dependence. There are different ways to achieve this, including expanding its own resource base in the CIS and other countries. The main objective should be to reduce alumina prices. Simultaneously, the antitrust agency decided that such goals could be achieved only by companies able to compete with the world's largest producers, which dictated their terms to other players.
Moreover, the Federal Antitrust Service seems willing to allow the merger, although the new company can become a monopolist on the Russian market. After all, it will promote Russian business on the global market.
RusAl and SUAl have almost no cooperation experience. In April 2006, they signed their first agreement on equal share participation in the Komi Aluminum project, which envisages the development, construction and operation of a bauxite and alumina facility built at the continent's largest bauxite deposit with proved reserves of 260 million tons. The two companies plan to reach an annual bauxite output of 6 million tons and to build an alumina plant with a capacity of 1.4 million tons by 2008.
Still, the merger is unlikely to generate serious changes on the global market. Russia traditionally exports ingot aluminum, while deeper processed products account for the bulk of Alcoa's and Alcan's business. The Russian companies will not be able to challenge their foreign rivals in the near future, either separately or together. But Russian aluminum will have to be reckoned with.
