Alcoa's Chalco sale shows China's changing times

BEIJING (Reuters) - Alcoa Inc pocketed a cool US$1.8 billion this week when it sold its stake in Aluminum Corp of China Ltd -- a handsome return on a six-year investment.

But Alcoa's willingness to cut the ties on its partnership with China's aluminium and alumina powerhouse shows how much China has changed since Chalco (2600.HK), a unit of state-owned Aluminum Corp of China, first listed in Hong Kong.

Chinese companies that once needed foreign partners to get the cash and know-how to build a new factory or access international markets are now confident, globally oriented firms with plenty of investment options.

Multinationals like Alcoa (AA.N), needing well-connected local partners to get a foot in the door, in many cases have since bought out the local partners, allowing more independence and management control.

But "China Inc's" ability to fund itself has permitted it to resume control over strategic sectors like minerals and steel, after a brief opening. Thus, Alcoa found its Chalco connection never translated into a stake in the promising Pingguo alumina project.

"It's never been laid out explicitly but the country doesn't want resources to be given over to foreign hands," Ren Baifang, analyst at Beijing metals consultancy Antaike, said.

"At one point China wanted the exploration and mining technology and equipment, especially from North America. But now there isn't such a gap. Most Chinese metals firms don't need capital -- prices have been up so much they have plenty of cash."

In the past six years, state firms including Chalco injected their best assets into units listed on the booming Hong Kong and Shanghai stock markets and tapped the corporate bond market.

The ballooning trade surplus left banks flush with cash and happy to lend -- meaning Chinese firms can now think of taking over overseas competitors while funding high-priority projects at home by themselves.

"Five years ago, Chinese companies needed money, now they don't," said Joe Singer, of Penfold Ltd., which owns a small share in recently-listed Western Mining (601168.SS).

"Then they couldn't really draw on a stock market. Now their valuations are higher than those in the West."

SEEKING VALUE

Chalco's shares have nearly tripled this year, outpacing a 40 percent gain in the index of Chinese firms listed in Hong Kong .HSCE on expectations that economic growth and its dominance in the domestic market would support its bottom line.

Chalco traded at 22 times 2008 earnings as of September 12, twice Alcoa's 10.3 times, HSBC estimated.

The stock closed at $18.68 a share, down 8.5 percent on Thursday after the news Alcoa would sell its 7 percent stake for US$2 billion, with a profit of US$1.8 billion. Its American Depositary Receipts (ACH.N) in New York dove 9 percent on Wednesday.

"We normally do not act as financial investors, but we participated in the Chalco IPO six years ago to help facilitate its entry into the capital markets," Alcoa chief executive Alain Belda said on Wednesday.

"Over the past seven years Chalco has become firmly established in the equity market so our role as a financial investor is no longer needed, and we can redeploy our capital into other value-adding options, including projects in China."

Listed Chalco and its parent have used their control over alumina supply to take over rival aluminium smelters across China, but the high prices of the raw material also attracted new competition into the alumina sector, pressuring margins.

Alcoa now has more options to expand in downstream, value-added sectors after its efforts to move into alumina with Chalco, or to invest even further upstream in power projects, came to naught.

"Alcoa doesn't really want to invest in Chalco, it wants to invest in the Chinese market. But the Chalco stake actually limited their flexibility to maneuver. They've had to act more like a fund than an investor in the sector," a consultant who advises foreign companies in the metals sector.

"Alcoa has already missed the boat on the raw materials sector in China."

Its existing projects in China notably don't include Chalco, although Belda said the two companies would continue to work together, including on investments outside China.

It has invested in packaging and heat exchanger materials for engines. It runs China's largest foil producer and exporter, a joint venture with conglomerate CITIC now under expansion.