Rio Tinto Ltd.'s $38.1 billion takeover of Alcan Inc. is set to reap benefits from not just China's appetite for aluminum, but also the bauxite and alumina needed to make it, analysts said on Friday.

Rio's recommended offer for Alcan, which immediately eliminated a lower one by arch-rival Alcoa Inc. will make Rio the world's largest aluminum maker.

With a combined smelting capacity approaching 4.4 million tons -- out of a projected 37 million tons to be consumed worldwide this year, Rio will easily eclipse other sector giants United Company Rusal, Aluminum Corp. of China and Alcoa in size.

It also elevates Rio to the world's number one bauxite miner and puts it on the way to becoming the top alumina supplier, without which aluminum cannot be made.

This puts Rio in a good spot to serve the China market, which is the world's fastest growing for aluminum and the raw materials, said Eagle Mining Research analyst Keith Goode.

It will also spread the Anglo-Australian company's profit center further from its key revenue getters iron ore and copper, giving it more status as one of the world's largest diversified mining houses better able to weather cyclical downturns in any single commodity.

Rio's shares eased 2.5 percent to A$101.30, tracking the London-listed shares lower, but remain near record highs.

Rio Chief Executive Tom Albanese, in announcing the knock-out $101 per share transaction -- a 65.5 percent premium to Alcan's record high share price in May -- emphasized the China connection.

This story is all about China, he said.

Rio, like its closest rivals is reaping billions in revenue from China's commodities boom, using much of the cash the same way -- to buy other companies.

CVRD bought Inco, BHP Billiton Ltd./Plc. snapped up Western Mining, while Xstrata acquired Falconbridge.

This all-cash bid illustrates the benefits of a current commodity boom for resource producers, generating record profits and strong balance sheets, Bob Cunneen Senior Australian Economist for AMP Capital Investors. The trend is for further consolidation.

Alcoa's decision to drop out of the bidding for Alcan has left it exposed to predators of its own, analysts said.

BHP, the world's biggest miner, was in talks with private equity firms to team up for a possible $40 billion bid for U.S. aluminum company Alcoa, said media reports this week.

Partners could include the Blackstone Group which had employed Paul O'Neill, a former United States Treasury Secretary and chief executive of Alcoa from 1987 to 1999, as one of its special advisers.

BHP shares hit a fresh record high in Australian trade, and closed up 1.1 percent at A$39.16 in afternoon trade.

CHINA DEMAND

Betting on the China story, say analysts, is a sure thing.

Aluminum consumption in China rocketed 47 percent in the first quarter of 2007, driven by strong growth in building construction, electrical power grids and consumer durables, said Eamon McGinn, a metals analyst at the Australian Bureau of Agricultural and Resource Economics in Canberra.

Next year, McGinn said, China should gobble around 13.2 million tons of aluminum, marking an 18 percent year-on-year rise.

While a portion of that aluminum will be produced domestically -- Chinese supplies have shown 14 percent compound growth for the last four years -- China still requires vast tonnages of bauxite and alumina.

Alcan's smelting assets are the main prize here, Merrill Lynch said in a clients report, which also noted the combined group's new ranking as world number one bauxite miner and number four alumina producer.

The Asia Pacific region is forecast to remain the fastest growing, as well as the largest, bauxite and alumina market in the world, last year accounting for 43 percent of global demand, according to researcher Global Industry Analysts.

Flags are up, though, over the slow pace of growth in the price of aluminum.

The interesting observation on this deal is that it only makes sense with a long-term aluminum price well above the level presently used by the market for valuations, said Peter Richardson, a strategist at Craton Capital, a Europe-based fund,

Richardson added that Rio, one of the most conservative mining companies when it comes to mergers and acquisitions, had concluded it was a lot cheaper to buy assets than build them.

Analysts forecast cash aluminum prices would average $2,712 a ton in 2007 in a Reuters poll on Wednesday, up 13 percent from forecasts at the start of the year.

($1=A$1.15)

China