China Zhongwang Holdings Ltd (HK:1333) failed to close a deal to buy Aleris last year after concerns were raised about the national security and corporate responsibility track record of the Chinese group.
Not that we think of Novelis as Indian, but they are. Since 2007, the ex-Alcan flat-rolled manufacturer has been owned by Hindalco Industries Ltd. (NS:HALC), part of India’s Aditya Birla Group. Novelis was already the world’s largest flat-rolled aluminum product producer before the Aleris deal.
Now, with the addition of Aleris, Novelis will acquire some very sophisticated aerospace technology — particularly in the plate market — and further secure the combined group’s position in high-technology products for the aerospace, automotive and defense sectors, not just in the U.S. but globally. Aleris is particularly strong in Europe and has just opened a new rolling mill in China.
Hindalco will acquire Aleris in a $2.6 billion deal, which will include $775 million of equity and $1.8 billion of debt, funded by Novelis rather than the parent, Reuters reported.
The market reacted positively to the news.
The combined entity, comprising Novelis and Aleris, will have annual revenues of $15 billion when Aleris’ $3 billion has been added.
Revenue aside, the group’s combined sheet-rolling position will become even more significant at 4.4 million metric tons, raising concerns in some quarters about its market-dominating position.
Although Novelis has invested heavily in facilities to meet rising automotive demand, it is traditionally one of the largest suppliers of aluminum for beverage cans, which is more at the commodity end of the market. Novelis’ ability to competitively serve these markets could be of immense value if the culture can be migrated to Aleris, whose focus has been more in the high-value aerospace and automotive industries and has struggled with profitability.
Market dominance fears aside, Western producers need to invest and create critical mass to counter growing exports from China’s giant semi-finished product manufacturers, which are continuing to add capacity despite having much more than the domestic market can consume.
China is exporting in excess of 4 million tons per annum of semi-finished products, so far aimed more at the commodity end of the market. But Chinese producers have the ability, certifications and domestic experience to service aerospace and automotive markets, too.
Current trade tariffs notwithstanding, Chinese producers are going to be increasingly targeting these markets, if not penetrating the U.S. then displacing Aleris and Hindalco in Europe, South America and Asia.
In the short term, the merger of Novelis and Aleris could generate cost savings, technology transfers and adoption of beneficial best management practices. In the longer term, it should be seen as positioning a more robust Western market leader against a growing threat from China, eager to compete in higher-value markets and willing to play the long game to get there.
by Stuart Burns