‘Not fit for purpose’: Merger will help struggling aluminium makers

Fund manager Allan Gray says rationalisation in the alumina market and US giant Alcoa’s proposed $3.3 billion takeover of ASX-listed Alumina Limited, which the fund is backing, will create the conditions for a brighter future for both companies.

Allan Gray, Alumina’s largest shareholder, said it would continue to support the merger of the companies through an all-stock transaction after Pittsburgh-based Alcoa entered into a binding agreement on Tuesday with Alumina Limited to proceed with the deal.

Aluminium smelting is extremely energy intensive and the lightweight metal, used in products ranging from car parts to soft drink cans, is often described as “congealed electricity”.

For years, production was underpinned by cheap electricity deals, often negotiated with government support, using coal-fired power. But today, the industry is struggling under the weight of uncompetitive prices and its troubles are threatening the livelihoods of thousands of workers and their families.

Alumina and Alcoa are joint-venture partners in a global portfolio of bauxite mines, alumina refineries and aluminium smelters – including the Portland smelter in south-west Victoria – which are run by the giant American partner.

Alcoa announced in January it would shut the Kwinana alumina refinery south of Perth this year with the loss of about 800 jobs. The company is also considering closing its San Ciprian operation in Spain.

“It is an industry in dire need of some rationalisation, which is coming with the closure of Kwinana and, with a bit of luck, San Ciprian. We hope that the next 10 years are much better than the previous 10,” Allan Gray portfolio manager Simon Mawhinney said.

“It’s hard to see the future being anything like the last 10 to 20 years for the aluminium industry. We look forward to having some exposure to the cycle.”

Mawhinney said he expected aluminium prices to rise as demand went up, as no new smelting capacity was being added.