Alcoa (NYSE: AA) management must feel like they're running on a treadmill or swimming in a flume. No matter the progress that the company makes with productivity or improved downstream operations, it feels as though ongoing global supply growth strips away the advantageous. So, although Alcoa continues to look underpriced, the brutal competition in this market makes it a hard stock to recommend to investors.

A Pretty Good First Quarter, All Things Considered
While the first quarter of 2013 was not exactly a record-breaking quarter for Alcoa, there were a lot of good things about it that speak well to management's commitment to a solid and efficient operating discipline.

Revenue fell 3% from Q1 2012 (1% sequentially), as aluminum shipments fell more than 5% and alumina shipments rose more than 7%. Gross margin improved significantly (by almost two points), while EBITDA increased by 11% YOY and operating income rose 29%. ATOI increased almost 19%, with three of the four segments showing year-on-year growth (global rolled products was the exception).

SEE: A Look At Corporate Profit Margins

Demand Isn't The Problem
Although the commercial construction market remains sluggish at best and the auto industry in Europe remains quite weak, all in all demand is not a major problem for Alcoa. Aerospace and turbine demand were both strong this quarter, which is a positive for major aluminum producers like Alcoa,
Rio Tinto (NYSE: RIO), BHP Billiton (NYSE:BHP), and Century Aluminum (Nasdaq:CENX). In fact, Alcoa was actually able to see solid results in its engineered products business (ATOI up 12%), and realized a premium for its aluminum.

More: Alcoa Has Improved, But It’s Still In The Aluminum Business

The problem is global supply. Alcoa is the fourth-largest primary aluminum producer and the major suppliers are behaving pretty responsibly. Small smelters in other countries (specifically China) continue to try to produce their way out of trouble – even though the current spot price is well below the price where they can operate on a cash flow positive basis. Uneconomic production can't continue forever, at least not unless the Chinese government wants to waste money subsidizing the smelters, but it can do real damage in the meantime.

Still, Alcoa is built to be a survivor. The company is a leading producer of both alumina and aluminum, and has economies of scale that few other smelters can match. Likewise, management has been quite proactive in getting out of low-margin/low-return businesses and allocating capital to manufacturing locations with long-term sustainable cost advantages (which usually means access to low-cost electricity).

It's also worth noting that Alcoa competes effectively where many smelters cannot: in value-added aluminum components. Companies like Boeing (NYSE:BA) and Airbus are not going to rely on “backyard smelters” in China to meet their production schedules, and Alcoa has managed to go up the value chain and produce components that sell for considerably more than their raw aluminum value. In a time where pricing is so aggressive, I think this is an important detail.

The Bottom Line
Alcoa is trading below its long-term average multiples. Even with a lower 2013 EBITDA estimate now in place due to lower aluminum prices (and higher expected production), a 6.5x multiple suggests a fair value of about $10.50. Remember, too, that 6.5x is below the long-term average of about 8x, though I don't think you can really argue for an average multiple when investors are so concerned about oversupply.

So does this make Alcoa a buy? I do believe that Alcoa is one of the best producers out there, and I do believe that there's a limit to how long small operators can produce aluminum at these prices. So, if you're patient and willing to accept Alcoa may be dead money for six months or more, I'd say the risk isn't too bad relative to the reward. That said, aluminum is a very difficult commodity market and it may be better for investors to focus on service/input providers like Koppers (NYSE:KOP) instead of primary metal producers.