Alcan Aluminium Limited

Alcan Aluminium Limited

1188 Sherbrooke Street West
Montreal, Quebec H3A 3G2
Canada
(514) 848-8000
Fax: (514) 848-8115

Public Company
Incorporated: 1902 as Northern Aluminum Company Limited
Employees: 57,000
Sales: US$8.76 billion
Stock Exchanges: New York Toronto Montreal Vancouver Midwest Pacific London Paris Brussels Amsterdam Frankfurt Basel Geneva Zurich Tokyo

Alcan Aluminium Limited is a primary force in the aluminum industry worldwide, competing with Aluminum Company of America (Alcoa) for the number-one ranking. The company has performed extraordinarily well, and is one of Canada’s highest profit-making companies, although profits dipped somewhat to US$835 million in 1989, and further to US$543 million in 1990, reflecting weak business conditions and lower prices. The company is a fully integrated aluminum producer, handling the light-weight metal at all stages of development, from bauxite mining to high-tech component fabrication.

Alcan is a multinational corporation. Operations are vertically integrated across ten operating areas worldwide. Bauxite is mined in seven countries and refined to alumina in nine. Primary aluminum smelters operate in seven countries, and a wide variety of aluminum goods are fabricated to differing degrees in plants in nineteen different nations. Alcan sells primary and fabricated aluminum in more than 100 countries around the world. Historically the company has followed a decentralized corporate model; overseas subsidiaries are left to manage their own affairs, even to the extent of financing expansion on their own.

Alcan’s international orientation dates back to its origins. In June 1928 the Aluminum Company of America, then the world’s undisputed leader in aluminum, spun off its foreign operations, forming a Canadian holding company called Aluminium Limited. Shareholders received one share of the new company for every three shares of Alcoa stock. For more than 20 years the two companies were controlled by the same individuals. Aluminium Limited penetrated foreign markets, and participated in international cartels away from the scrutiny of the United States Justice Department. Alcoa, meanwhile, dominated the U.S. market.

Alcan’s history, however, began long before the 1928 spinoff. In 1899 The Pittsburgh Reduction Company—later Alcoa—began construction of a power plant and the first Canadian reduction works at Shawinigan Falls, Quebec. Aluminium production began two years later. This first Canadian subsidiary became known in 1902 as Northern Aluminum Company Limited.

Northern Aluminum became an important player in the global aluminium markets. Aluminum was still a new metal. A commercially feasible refinement process had been discovered in 1886, but industrial applications were somewhat slow in developing. Skepticism among manufacturers forced producers toward vertical integration. Pittsburgh Reduction, and its Canadian subsidiary Northern, were tireless in trying to develop aluminum markets, but eventually turned to fabricating products such as cooking pots to promote the metal and broaden sales.

Several countries, in addition to the United States and Canada, each had one or two aluminum producers. European businesses often organized distribution in industries where demand was limited, and after the turn of the century, cartels were formed to set the prices and quotas for individual aluminum companies. The first of these cartels began in 1901, and was known as the Aluminium Association. The cartel, which was made up of the leading Swiss company, the leading British company, and a pair of French companies, in addition to the Canadian concern, divided the world into reserved markets and free markets. Each company was allotted a reserved market and given a quota on a percentage basis for the free markets. The Swiss company was the distributor for all participants. This cartel operated until 1908, and then broke up over disagreements on price-setting. In 1912 a new cartel was created, this time allowing any member to sell its quota directly to customers in any market without restriction. This second cartel broke up in 1915, disrupted by World War I.

While technically Alcoa was not a member of the cartels, it did effectively participate through its wholly owned Canadian subsidiary. This association would later fuel antitrust actions against Alcoa and eventually contributed to the divestiture of Northern Aluminum and Alcoa’s other foreign operations in 1928.

Demand for aluminum grew in the early years of the 20th century. Applications for the metal were found in the electrical and automotive industries. By 1914 80% of U.S.-made cars had aluminum crank and gear cases. Aviation, at that time a new industry, called for light-weight metals. Orville and Wilbur Wright had used aluminum in their first plane at Kitty Hawk, North Carolina.

World War I provided new applications for aluminum. Massive quantities of the metal were employed in explosives, ammunition, and machine guns; and the Liberty V-12 engine, which powered Allied planes, was one-third aluminum. Military usage absorbed 90% of the aluminum produced during the war years. The widespread use during the war translated into widespread acceptance by consumers after the war. Furthermore, the interruption of European aluminum shipments to North America served as a boon to Northern Aluminum after the war. In 1919 Northern alone exported 5,643 tons of Canadian aluminum to the United States compared to 2,360 for all European producers combined.

The 1920s saw fantastic growth for Northern Aluminum. In the early years of the decade, Arthur Vining Davis, head of Alcoa, became interested in two or three hydroelectric plants being proposed by U.S. tobacco magnate James B. Duke on Quebec’s Saguenay River because the refinement of aluminum requires vast amounts of electricity.

Davis called upon A.W. Mellon, renowned financier and major stockholder in Alcoa, to help negotiate a deal with Duke. In 1925 a deal was struck. The aluminum company acquired the hydroelectric site at the so-called Lower Development, as well as water rights to the Upper Development. Duke took $16 million in preferred stock and 15% of the common stock of Alcoa. When Duke died three months after the deal was signed, Alcoa was given the opportunity to purchase a controlling interest in the Upper Development. Also in 1925, Northern Aluminum Company changed its name to Aluminum Company of Canada Limited.

These events secured the Saguenay River hydroelectric facilities, the foundation for today’s Alcan operations. Growth on the site was feverish; by 1927, the power plant on the Upper Development supplied a new 27,000-ton smelter, and the refinery neared completion. The company town of Arvida, named after Arthur Vining Davis, sprang up, and the development became the world’s largest aluminum production site during World War II.

In 1928 when Alcoa divested its overseas operations, the Aluminum Company of Canada, Limited became the chief operating subsidiary of Aluminium Limited. Aluminium Limited also took over all of Alcoa’s other non-U.S. holdings including Norwegian, Italian, French, and Spanish manufacturing and power concerns. Alcoa retained ownership of the power plants on the Saguenay until 1938, when Aluminium Limited purchased them for $35 million. Also at this time, the company moved its headquarters to Montreal from New York, although some senior executives continued to work in New York.

There were several reasons for the spin-off of Aluminium Limited (AL) from Alcoa. Davis felt that Alcoa’s sales force neglected overseas markets in favor of the domestic market. He believed a Canadian company, with its own directors and own staff, would be in a better position to exploit international markets throughout the British Empire and elsewhere. Also, Alcoa’s domination of the aluminum industry made it a frequent target of U.S. antitrust accusations. By divesting its foreign subsidiaries, Alcoa at least created the impression that it was not excluding competition from abroad. Meanwhile, the new company was free to participate in international cartels as it pleased.

Finally, Davis was nearing retirement, and would soon be faced with choosing a successor. The choice was between his brother Edward K. Davis, and his long-time close friend and colleague, Roy Hunt. Hunt was the son of Alcoa’s co-founder, Captain Alfred E. Hunt. Davis solved his problem by sending Edward Davis north to head the new international corporation.

Edward Davis, as AL’s first chief faced some difficult challenges in the company’s early years. Although not truly an infant company, AL had to redefine its approach. Formerly, the company had been a part of a vertically integrated whole. Now it was expected to compete worldwide, but it lacked the aluminum-fabrication capability to make finished products that Alcoa and the European producers had.

The Depression struck the company hard, and it was forced to borrow heavily to survive. Technical support and operating agreements with a benevolent Alcoa helped the company stay afloat. For the most part, AL did not compete with Alcoa in the U.S. market, due to a substantial U.S. tariff on imports and to the influence of Alcoa’s and AL’s common shareholders. As a result, AL pursued instead Asian and European markets.

Realizing it could not survive unless it integrated its operations, AL built fabricating plants in a number of countries worldwide. The growth of the automotive and aviation industries improved the position of AL. By 1937 the company was out of debt and operated profitably. Production capacity at the Arvida plant had doubled and the number of employees worldwide since 1928 had tripled. In 1937 the U.S. Justice Department filed an antitrust suit against Alcoa, Aluminium Limited, and 61 related subsidiaries and individuals. The suit called for the break-up of Alcoa, and its divorce from AL. The suit alleged Alcoa and its confederates had conspired to restrain imports and to preserve its U.S. monopoly. In 1942 Alcoa and Aluminium Limited were cleared of the charges. The 1942 decision was appealed and was upheld on all counts except one. The appeals court opined that at the time of the original decision, Alcoa monopolized the U.S. ingot market, but that since that time new competition seemed to have evolved. The court therefore delayed further action until an assessment of the postwar industry could be made.

In 1950 the court calculated that the same nine stockholders controlled 44.65% of AL’s stock and 46.43% of Alcoa’s stock. While the court said that the relationship between the two companies had been lawful in the past, it ordered the investors to divest the shares of one company or the other. It was the first time in history that U.S. investors had been ordered by their government to give up control of a foreign company. All of the investors except Edward Davis, who sold his Alcoa stock, sold their shares in the Canadian company. The suit remained open until 1957, when a Justice Department request for extended court supervision was denied. In the 20 years this case was open, the aluminum industry had undergone tremendous change, and AL had grown into a giant.

The late 1930s had seen demand for aluminum explode, fueled by war preparations. AL was the largest supplier within the British Empire, and Britain’s demand for airplanes and other military hardware was great. During the war, the Canadian company received US$78 million in low-interest loans from the British government to expand its power and reduction facilities. In return, the additional output was earmarked for the British market. The U.S. government also offered assistance to AL; the Defense Plant Corporation, the branch of the Reconstruction Finance Corporation charged with fostering warindustries production, paid US$68 million in advance for 1.3 million pounds of aluminum. AL reportedly used the cash flow to construct another dam on the Saguenay, the Shipsaw Power Plant Number 2. The purchase agreement annoyed U.S. producers, who saw it as a boost to a potential competitor after the war. AL’s contribution to the war effort was, however, paramount.

The Aluminium Limited subsidiary Aluminum Company of Canada (Alcan) ended the war five times larger than it was in 1937. This expansion posed the threat of idle facilities after the war. The company’s researchers worked on expanding aluminum applications in the automotive and rail transport industries.

World War II boosted other companies as well. In the United States, two new integrated concerns, Reynolds Metals Company and Kaiser Aluminum & Chemical Corporation, were born from favorable sales of government-owned aluminum plants built during the war. This new competition was not immediately threatening to Alcan, whose chief production at that time was in ingot rather than fabricated or semi-fabricated products. In addition, Alcan’s Shipsaw Power plant in Quebec had indeed made Alcan’s electricity costs the lowest in the world.

In 1946 Alcan announced a reduction in the ingot aluminum price to C13.2¢, or US12.04¢ per pound. This was well below most international producer’s prices, and kept Alcan’s price on a par with the price of US15¢. The signal was that Alcan intended to be the dominant primary—ingot—aluminum supplier worldwide.

In 1947, Nathanael V. Davis took over as CEO of Aluminium Limited from his father, Edward Davis. After a brief dip in aluminum consumption right after the war, consumer goods began to use the metal in quantities as never before. By 1950 the Korean War demanded a steady flow of aluminum for the military, and a shortage developed in the United States. U.S. producers increased their output, and several new competitors joined the field.

During the 1950s the United States imported 10% to 20% of its primary aluminum. Alcan controlled 90% of that import business. In 1951 Alcan began a $350 million expansion program, which included additions to the Quebec plants and a new hydroelectric and reduction site in British Columbia, which began operations in 1954.

In 1950, when the strong ownership ties between Alcoa and Alcan were severed, the Canadian company began to make more aggressive forays into the U.S. market. Occasionally, Alcan broke with tradition and set prices at rates lower than Alcoa. Alcoa’s price leadership was followed loyally by other U.S. producers. Alcan focused on aluminum in primary-ingot form, while Alcoa, Reynolds, and Kaiser dove into the semi-fabricated and fabricated products. Alcan’s U.S. customers, were independent fabricators, as well as Alcoa, Reynolds, and Kaiser themselves. The independents were Alcan’s political allies, lobbying for low tariffs on primary aluminum.

While Alcan’s exports to the United States grew in the early 1950s, market shares in other areas began to shrink. Norway and France doubled their domestic aluminum capacity, while historic importers like Germany and Japan began to develop their own industries. Although overall output increased, Alcan’s percentage of world production declined from 21% in 1954 to 19% by 1960. By 1969 it had slid to 13%.

In 1957 Alcan’s first domestic competitor, Canadian British Aluminum (CBA), was started. During the summer of 1957 a strike at Alcan’s Arvida plant idled 45% of production capacity for four months, resulting in a loss of about 1,000 tons of aluminum production per day. Later in the year, recessionary conditions caused a global oversupply of aluminum, and Aluminium Limited’s profits dipped for 1958. Sales of primary aluminum to U.S. and U.K. producers declined.

Alcan decided to bolster its fabrication efforts. In 1958 Alcan expanded fabricating operations in plants in 11 countries. The global oversupply lasted into the early 1960s, however, and as it worsened, U.S. producers slashed prices to near cost to keep plants running. Alcan slowly was being squeezed out of the U.S. market. In response, Alcan decided to build semifabricating plants of its own in the United States to establish stable outlets for its ingot.

In 1963 AL acquired a small U.S. metal-powders firm and an aluminum-wire and -cable firm. Alcan and three of its biggest U.S. independent customers, Cerro Corporation, Scovill Manufacturing, and National Distillers & Chemical Corporation, began construction of a US$45 million hot mill in Oswego, New York, that would produce coils and aluminum plate. Alcan bought out its partners in 1965, and also acquired other sheet-fabricating plants owned by Cerro and National Distillers. A U.S. subsidiary, Alcan Aluminum Corporation, was founded in Cleveland, Ohio, in 1965 to manage AL’s U.S. fabrication concerns. The unit lost US$10.4 million in its first year, but persevered. By 1967 Alcan operated 12 plants in 8 U.S. states. In 1966 Aluminium Limited was renamed Alcan Aluminium Limited.

In 1968 Alcan reorganized its corporate structure. Rapid expansion taxed the company’s decentralized system; 33 managing directors reported directly to presidental CEO Davis. Subsequently, management was divided into three groups: raw materials, smelting, and fabricating and sales.

In the late 1960s another fundamental shift occurred in Alcan Aluminium’s business. Higher transportation and labor costs eroded the advantage of refining aluminum in Canada, as did the availability of cheaper power in the United States. Political developments around the globe made it advantageous for Alcan Aluminium to build primary smelters in Australia, Britain, India, Norway, and Japan. By 1972, Alcan Aluminium’s foreign smelting capacity equaled that of its Canadian facilities. Alcan Aluminium had begun to develop integrated units within each country of operations.

Alcan Aluminium’s shift toward finished products continued. In 1971 Alcan Aluminium shipped more fabricated and semi-fabricated tonnage than ingot for the first time. In 1972 Paul H. Leman took over as president of Alcan Aluminium Limited. Davis remained CEO and took on the new post of chairman. The French-Canadian Leman was Alcan’s first president outside the Davis family. He had joined Alcan in 1938. In 1975 global recession brought on by the oil crisis, caused a decline in Alcan Aluminium’s aluminum shipments by 16% worldwide. Profits took a dive as demand fell in all markets except Latin America. Alcan Aluminium continued to build plants overseas, however, adding an alumina refinery in Ireland, and participating in the development of new bauxite mines in Brazil in the mid-to late-1970s.

Labor troubles caused the shutdown of four of the company’s five Canadian smelters in 1976. Damage to one plant, caused by molten aluminum hardening in the potlines when workers cut the power, cost an estimated US$25 million. Another strike three years later had a similar effect on Alcan Aluminium’s production levels. During both of these strikes other producers took advantage of the banner growth years for aluminum.

In the mid-1970s, plans to expand smelting capacity in Canada were mapped out. Uncertainty about the future of energy costs encouraged Alcan Aluminium and its Alcan subsidiary to take advantage of its own Canadian hydroelectric plants. In 1977 David Culver replaced Leman as president. The executive observed that Alcan Aluminium was the only aluminum producer in the world with the ability to expand by 30% without increasing its power costs. By 1978 construction on a new primary smelter in Quebec was well under way.

In July 1979 Davis stepped down as Alcan Aluminium’s CEO, and was replaced by Culver but continued as chairman until 1986. Culver had joined Alcan Aluminium in 1949, and had worked his way up the sales side. He set out to bolster Alcan Aluminium’s marketing efforts and strengthen the emphasis on fabricated products, eventually limiting ingot sales to 25% of the total. Culver initiated a new research-and-development push in 1980. Alcan Aluminium lagged in highmargin aerospace, automotive, and beverage-container markets due to dated technology.

In the early 1980s Alcan Aluminium opened new smelters in Australia and Brazil, and expanded facilities in West Germany, Britain, and Spain. The company was in a very strong financial position to face the next decade. Annual revenues had doubled since 1975 and earnings had increased eightfold. Debt was low.

Alcan Aluminium’s financial strength proved a blessing when the recession of 1980 to 1982 reached the aluminum industry. Demand fell sharply. In 1982 Alcan Aluminium lost US$58 million, its first loss in 50 years. Several long-term factors came to a head in the 1980s. Increased use of scrap resulted in lower aluminum prices. New Third World producers entered the market in force. In 1960, six producers— Alcan Aluminium, Alcoa, Reynolds, Kaiser, France’s Pechiney, and Switzerland’s Alusuisse, controlled 70% to 80% of the free world’s aluminum market. By 1981 their share was 40% to 50%. More than 80 companies, double the 1960 number, produced aluminum goods worldwide, and about 30% of Third World producers were owned at least in part by their governments, whose interest was oriented toward full employment and acquiring hard currency rather than toward maximizing profits or maintaining supply-and-demand equilibrium. Another factor was increased price volatility after aluminum was listed on the London Metals Exchange in 1978. Private deals between producers and buyers became obsolete, and buyers gained tremendous advantage when the exchange price was publicized daily.

The industry would adjust to these developments, but not until the latter half of the 1980s. Meanwhile, Alcan Aluminium overproduced, partly to exploit its hydroelectric power advantage while high oil prices greatly affected other producers, and partly to placate labor. Profits returned in 1983 and 1984.

In 1985 Alcan Aluminium trimmed 1,100 management jobs, cutting an estimated C$40 million in costs annually. Alcan Aluminium went forward with plans to modernize its plants in Quebec, and when aluminum prices rebounded in 1985, Alcan Aluminium was better prepared to take advantage of it than any of its competitors.

In 1986 Alcan Aluminium’s top managers devised a new long-term strategy to improve Alcan Aluminium’s return on equity. The plan focused on technological applications of aluminum and related metals particularly in aerospace, electronics, and ceramics. Aluminum-lithium alloys were tested in Canadian and British aircraft. Composite aluminum materials also found applications in rail-car and automotive assembly. Alcan Aluminium bought a gallium-purification subsidiary of Alusuisse in 1985, and planned to manufacture gallium arsenide semiconducting wafers. The company also reaffirmed its commitment to existing aluminum operations, including ingot production.

In 1987 Alcan Aluminium underwent a reorganization. Alcan Aluminium Limited, the parent company, was merged with its chief operating unit, Aluminum Company of Canada. All of the former parent’s subsidiary units worldwide were transferred to the former Canadian operating unit, and the reorganized company took the name Alcan Aluminium Limited (Alcan). The arrangement shed layers of management. Alcan’s leaner structure and clear direction helped the company earn record profits in 1988. Alcan’s net of US$931 million was more than any Canadian company had ever earned.

In July 1989 David Culver retired. Alcan’s new chairman and CEO was David Morton, who had joined the company’s British subsidiary in 1954. As Morton took over as CEO of Alcan, the world was headed for another recession.

Alcan’s future looks sound. Diversification into related fields and emphasis on high-tech fabrication should help the company meet the challenges of the 1990s. Alcan planned to replace its outdated smelters in Quebec, hoping to spend US$1 billion by 1994 if aluminum prices were favorable. A free trade agreement with the United States gives Alcan extra punch in the world’s single largest aluminum market. As business trends continue to emphasize global markets, Alcan’s long history of successfully developing foreign markets and industries is likely to give it still another advantage in the aluminum industry of the future.

Principal Subsidiaries

Alcan Aluminio del Uruguay S.A. (89.2%); Alcan Aluminio do Brasil S.A. (Brazil); Alcan Aluminum Corporation (U.S.A.); Alcan Asia Limited (Hong Kong); Alcan Australia Limited (73.3%); Alcan Alluminio S.p.A. (Italy); Alcan Deutschland GmbH (Germany); Alcan International Limited; Alcan Jamaica Limited; Alcan New Zealand Limited; Alcan Nikkei Korea Limited (Hong Kong, 51%); Alcan Pacific Limited (Japan); Alcan Rorschach AG (Switzerland); Alcan Siam Limited (Thailand, 70%); Alcan Smelters and Chemicals Limited; Aluminium Company of Malaysia Berhad (63.9%); Aughinish Alumina Limited (Ireland, 65%); Alcan Rolled Products Company; British Alcan Aluminium plc (U.K.); CAMEA S.A. (Argentina, 99.6%); Compagnie des Bauzites de Guinee (Guinea, 13.8%); Ghana Bauxite Company Limited (Ghana, 45%); Indian Aluminium Company Limited (India, 39.6%); Johore Mining and Stevedoring Company Sdn. (Malaysia, 70%); Mineracao Rio do Norte S.A. (Brazil, 24%); Nippon Light Metal Company, Ltd. (Japan, 45%); Nonfemet International Aluminium Company Limited (China, 33%); Petrocoque S.A.—Industria & Comfcio (Brazil, 25%); Queensland Alumina Limited (Australia, 21.4%); Roberval and Saguenay Railway Company; Technal S.A. (France); Toyo Aluminium K.K. (Japan, 49%); Tubo-pack S.A. (Chile, 45%).

Further Reading

Hight, Jack, “Kingdom of the Saguenay: Canada’s Sprawling Aluminium Giant,” The Iron Age, April 5, 1945; Farin, Philip, and Gary G. Reibsamen, Aluminium: Profile of an Industry, New York, Metals Week, 1969; “Why Alcan spends so much,” Business Week, July 10, 1971; Levy, Yvonne, Aluminium: Past and Future, San Francisco, Federal Reserve Bank of San Francisco, 1971; “Alcan’s Latest CliffHanger,” Forbes, November 1, 1977; Smith, George David, Campbell, Duncan C., Global Mission: The Story of Alcan, 3 Vols., Montreal, Alcan Aluminium Limited, 1985-1990; From Monopoly to Competition; The Transformation of Alcoa, 1888-1986, Cambridge, Cambridge University Press, 1988; Ross, Alexander, “The Alcan Succession,” Canadian Business, June 1989.

—Thomas M. Tucker