Novelis: Towards approval of Aleris deal loses Lewisport

Aditya Birla Group as the owner of Hindalco and, therefore, Novelis secured its position as the world’s largest producer of value-added aluminium products with the completion of the $ 2.8 billion acquisition of Aleris in 2019, though the approval from the U.S. Justice Department has been pending ever since the deal was announced in March last year.

Novelis and Aleris combined are said to control some 60% of the U.S. automotive aluminium sheet market, raising fears the supreme position would see too dominant a position for the merged company.

Hindalco and Novelis are a global company with 49 manufacturing facilities in North America, Europe, and Asia with revenues of some $12.3 billion last year.

Aleris is much smaller with 13 facilities across North America, Europe, and China and revenues of the $3.4 billion, holding a colossal role in the automotive sheet through its Lewisport, Kentucky plant. The plant includes a 350 kt hot mill and a 200 kt automotive cold mill serving the North American market.

European approval was given last year on the basis Novelis would sell Aleris’ Duffel mill in Belgium. The mill comprises 80 kt automotive sheet line and an additional capacity of 100 kt in other speciality products. The sale of Duffel was agreed to Liberty House’s GFG Alliance, as this also acquired the Dunkerque aluminium smelter from Rio Tinto in December 2018.

The loss of Aleris’ Lewisport mill was probably the cost of approval which Hindalco knew but it attempted to convince the Justice Department that steel and aluminium sheet for automotive applications should be taken as one market, not two. Seen in that context, Novelis/Aleris do not hold anything like a dominant position, arguing some 90% of all automotive sheets are still steel. The Justice Department thought differently and decree against the company.

Approval is still needed in China to finalize the deal, but the sale of Duffel and Lewisport clears two of the largest hurdles. The ruling will reduce the cost to Novelis at a time when sales are severely depressed and debt taken on to fund the purchase has to be funded by much-reduced revenues. Indeed, much of the acquisition cost was legacy debt in Aleris, the underlying company sold for the just $775 million but came with $2 billion of legacy debt which Novelis has funded in part by taking on a short-term $1.5 billion bridging loan.

The Justice Department’s decision is favourable for consumers for the short term; sustaining a more competitive supply market will support to keep down prices for consumers.

The future security of Lewisport is predominant in a longer time. The new owner needs to be adequately well funded and experienced in the aluminium automotive sheet market to ensure the site’s long-term viability. In the final point, consumers need is increased short-term competition at the price of long-term supply security.

North America is already facing the challenge for the supply of high-quality aluminium sheet due to COVID-19 pandemic.