Aluminum gets hot. Who'll get bought next

NEW YORK (CNNMoney.com) -- Consolidation is brewing in the aluminum industry - giving investors reason to keep a close watch on stocks in the sector.

Speculation that mining giants BHP Billiton (Charts) and Rio Tinto (Charts) are both circling Alcoa (Charts) resurfaced Tuesday.

As aluminum prices look sure to increase in 2007, buyers may look to Alcoa, the world's largest producer of the metal.

Talk that either company might make a $40 billion bid for the world's largest aluminum producer cast the spotlight on other players - and potential targets - in the sector.

BHP Billiton and Rio Tinto already have exposure to metals like copper and nickel - giving them reason to target a growing industry like aluminum.

And following the commodities boom, these mining giants are swimming in cash, said Charles Bradford, an analyst with Soleil-Bradford Research.

Aluminum is used in everything from planes to cars to packaging. Demand for the metal is expected to grow about 7 percent this year, fueled mostly by China's growing appetite, said Karen McBeth of the metals group at Platts, a provider of global commodity information.

But some industry observers said that an Alcoa takeover was unlikely. "We'll believe it when we see it," said Brian Hicks, co-manager of the Global Resources Fund at U.S. Global Investors.

For one, Alcoa owns a lot of so-called downstream assets - such as plants that make aluminum foil and other products - that mining companies haven't shown much interest in owning.

Instead, a better fit for mining companies looking to expand into aluminum might be a smaller producer like Century Aluminum, Hicks said.

Another potential target in the sector: Canada's Alcan. The No. 2 aluminum producer would be an attractive target since it doesn't own any downstream assets, industry analysts said.

Alcan spun off its aluminum rolled products unit a few years ago into Novelis (Charts), which agreed over the weekend to be acquired India's Hindalco Industries in a deal valued at about $6 billion.

"Alcan makes more sense. It would cost less and it has no downstream business," Bradford said.

Alcan has a market worth of about $21 billion market, versus Alcoa's nearly $30 billion market cap.

Alcoa (up $2.10 to $35.00, Charts) shares jumped 6 percent Tuesday and other stocks in the sector followed. Alcan (up $2.56 to $54.75, Charts) shares climbed 5 percent and Century Aluminum (up $2.26 to $47.92, Charts) stock also added about 5 percent.

While private equity firms have been snapping up companies in media, consumer products and other businesses at a rapid clip, aluminum producers may not be attractive to these buyers, analysts said.

That's because aluminum is an up-and-down business that swings with cycles of economic growth, and so has a less predictable stream of earnings than many other businesses, the analysts noted.

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