China's major aluminum companies are making inroads to higher value-added markets such as autos and aerospace. The CEO of Novelis, the world's leader in manufacturing rolled aluminum products, said that he expects fierce competition with Chinese firms in markets long dominated by US and European manufacturers, as well as an overall growth in the market by up to 5 percent next year. Chinese companies are expected to try to acquire Western metals companies, but regulatory approvals are also uncertain.
China's giant aluminum makers are pushing into the global automotive and aerospace markets, with industry sources expecting their presence to heat up competition and possibly spark a buying spree for Western metals companies.
China's top aluminum companies are venturing into the more lucrative parts of the global value chain, on course to seize market share from the likes of Alcoa and Constellium, as they look to buy into foreign firms to boost their technical know-how and expand their reach.
The chief executive of Novelis Inc, the world's leader in manufacturing rolled aluminum products, said last week that he expected competition with Chinese producers to be "very fierce" over the next five to 10 years in the more lucrative sectors of aerospace and engineering - which so far have been dominated by European and US manufacturers.
"Certainly [Chinese aluminum makers] will be able to produce high-quality products as well," Steve Fisher told the Reuters Commodity Summit in Seoul.
He also said that he expects demand for the metal to grow by up to 5 percent next year.
Zhongwang USA LLC, backed by Chinese aluminum magnate Liu Zhongtian, said in late August that it would buy high-precision aluminum product maker Aleris Corp in a deal worth $2.3 billion, marking the biggest entry by a Chinese company into the US aluminum industry.
The deal for Aleris, a supplier to the US defense industry, has yet to be approved by US regulators.
"If Aleris is acquired by the Chinese, it would be logical to think that there would be more competition within the more lucrative sectors such as aerospace and automotive," said analyst Robin Bhar of Societe Generale in London.
He noted that's where the better margins are.
"But Aleris is quite a significant supplier to the US military, so it's by no means a done deal."
Shares of Amsterdam-headquartered aluminum product maker Constellium jumped after the announcement, reflecting bets that it could be next. Constellium did not immediately respond to an e-mailed request for comment.
"There will be more announcements of purchases by Chinese companies of foreign firms in the next 18 months and continued consolidation globally," said Charlie Durant of consultancy CRU in London.
"It will enable Chinese producers to better utilize their equipment in China, as well as obviously getting the access to markets around the world."
Alcoa is spinning out its precision manufacturing business into a company to be named Arconic, which industry sources said could be another potential target.
Arconic expects to grow its automotive sheet revenue around sixfold, to $1.3 billion in 2018 from $229 million in 2013. It has already signed $10 billion with customers including Boeing and Airbus.
An Alcoa spokesperson declined to comment.
"Zhongwang have been openly pursuing a downstream focus for years, but they aren't the only ones with capital, a healthy balance sheet and an appetite to expand downstream," said Paul Adkins, managing director of Beijing-based consultancy AZ China.
Adkins viewed two Chinese companies - China Hongqiao Group and Shandong Nanshan Aluminium - as potential bidders.
Hongqiao Group declined to comment. Nanshan's board secretary said that the company hasn't received any information about possible mergers from the board.
Shandong Nanshan said in July that the company aims to tap growth in new energy vehicles to become a top automotive as well as a major aerospace materials supplier as it strives to meet international certification standards.
Novelis sees demand for the metal growing 4 percent to 5 percent in 2017, boosted by sales to carmakers and can manufacturers, according to company executives.
"Globally we see somewhere around 4-5 percent of downstream rolled aluminum growth," Novelis' Fisher told Reuters.
"That varies region to region, product to product, but that's kind of an overall growth rate that we see for aluminum through 2017," he said.
In Asia, aluminum demand for both automobiles and cans is expected to grow faster than the rest of the world due to the population growth and increasing environmental awareness.
"Cans could grow 5 to 6 percent in Asia, Southeast Asia will be 7 to 8 percent, but automotive 20 to 25 percent," said Sachin Satpute, president of Novelis Asia.
"I can tell you if electric vehicles come ... it will be exponential," he said.
US-based Novelis supplies aluminum to automakers such as Jaguar Land Rover and to beverage makers like Coca-Cola.
Global aluminum makers have been boosting their capacity to meet rising demand from automakers looking for lighter alloys to replace high-strength steel and to use in electric vehicles.
"For electric vehicles, the critical element is miles or kilometers per charge," said Satpute, adding that lighter-weight components are crucial to making power charges last longer.
"For that, aluminum is a perfect solution," he said.
Asked about premiums on primary aluminum for next year, the Novelis chief said that they should remain near current levels.
"We don't see what would drive them to move up significantly again as we saw a few years back," he noted.
