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Alcoa Predicts Aluminum Boom
Alcoa (NYSE:AA) established aggressive revenue growth targets for the next three years in its business segments as the company predicts it will benefit from several global macro trends that will lead to higher demand for aluminum. (For related reading, see Cashing In On Macroeconomic Trends.)
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Macro Trends
These trends include increased population growth and further urbanization of society in many countries. Alcoa cited projections that the population of the world will increase by an additional 2.5 billion people by 2050, reaching 9.1 billion, and the percent of the world population living in cities will increase from 50 to 60% by 2030.
Another macro trend is the increased awareness regarding environmental issues, which is driving the use of lighter weight materials. The management of Alcoa cited an example of reducing the weight of a vehicle by 10% through using aluminum instead of traditional materials. This led up to a 7% increase in fuel efficiency.
Alcoa believes that these two trends will drive demand for aluminum as it has many qualities that make it a preferred material in areas such as construction, packaging, consumer electronics and transportation.
Demand
Alcoa is planning for a huge jump in demand for bauxite, alumina and aluminum over the next decade. The company estimates that annual demand for Aluminum will grow from 39 million metric tons in 2010 to 73 million metric tons by 2020, for a compound annual growth rate of 6.5%. Demand for other products in the aluminum supply chain, like bauxite and alumina will also increase over the same time frame.
Global Rolled Products
The global rolled products business provides aluminum for use in aircraft, building materials and packaging. In the segment, Alcoa is targeting $2.5 billion in additional revenue by 2013.
Engineered Products and Solutions
The engineered products and solutions segment provides aluminum for use in highly engineered products in the aerospace, power generation and commercial transportation industries. Products here include items like fasteners, airfoils, extrusions and wheels. Alcoa is targeting $1.6 billion in additional revenue in this segment by 2013.
Other companies involved in supplying engineered products include Kaiser Aluminum Corporation (Nasdaq:KALU), which recently purchased Alexco, LLC, a manufacturer of alloy extrusions for the aerospace industry.
New Capacity
Alcoa is starting to prepare for this increased demand. The company recently started construction on an aluminum smelter and rolling mill in Saudi Arabia. Alcoa said that the facility will have an annual smelter capacity of 740,000 metric tons of metal, and the mill will have an annual capacity of 380,000 metric tons.
A second phase of the project is also planned, which will be composed of a bauxite mine and refinery. The total cost of the joint venture, which will be share by Alcoa's Saudi Arabian partner, is estimated at $10.8 billion.
Another way to play the increased demand for aluminum is through the companies that will help build all this new capacity. In May 2010, Fluor (NYSE:FLR) was awarded contracts worth $453 million for engineering, procurement and construction management services at the new Saudi Arabian facility.
Earnings for other companies in the aluminum business have improved relative to last year. Noranda Aluminum Holding (NYSE:NOR) reported third quarter 2010 operating income of $20.07 million, compared to a small loss in the same quarter of 2009.
The Bottom Line
Alcoa sees a boom in demand for aluminum over the next decade due to several macro trends that support this higher growth rate. The company is preparing for this through the expansion of capacity.
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Macro Trends
These trends include increased population growth and further urbanization of society in many countries. Alcoa cited projections that the population of the world will increase by an additional 2.5 billion people by 2050, reaching 9.1 billion, and the percent of the world population living in cities will increase from 50 to 60% by 2030.
Another macro trend is the increased awareness regarding environmental issues, which is driving the use of lighter weight materials. The management of Alcoa cited an example of reducing the weight of a vehicle by 10% through using aluminum instead of traditional materials. This led up to a 7% increase in fuel efficiency.
Alcoa believes that these two trends will drive demand for aluminum as it has many qualities that make it a preferred material in areas such as construction, packaging, consumer electronics and transportation.
Demand
Alcoa is planning for a huge jump in demand for bauxite, alumina and aluminum over the next decade. The company estimates that annual demand for Aluminum will grow from 39 million metric tons in 2010 to 73 million metric tons by 2020, for a compound annual growth rate of 6.5%. Demand for other products in the aluminum supply chain, like bauxite and alumina will also increase over the same time frame.
Global Rolled Products
The global rolled products business provides aluminum for use in aircraft, building materials and packaging. In the segment, Alcoa is targeting $2.5 billion in additional revenue by 2013.
Engineered Products and Solutions
The engineered products and solutions segment provides aluminum for use in highly engineered products in the aerospace, power generation and commercial transportation industries. Products here include items like fasteners, airfoils, extrusions and wheels. Alcoa is targeting $1.6 billion in additional revenue in this segment by 2013.
New Capacity
Alcoa is starting to prepare for this increased demand. The company recently started construction on an aluminum smelter and rolling mill in Saudi Arabia. Alcoa said that the facility will have an annual smelter capacity of 740,000 metric tons of metal, and the mill will have an annual capacity of 380,000 metric tons.
A second phase of the project is also planned, which will be composed of a bauxite mine and refinery. The total cost of the joint venture, which will be share by Alcoa's Saudi Arabian partner, is estimated at $10.8 billion.
Another way to play the increased demand for aluminum is through the companies that will help build all this new capacity. In May 2010, Fluor (NYSE:FLR) was awarded contracts worth $453 million for engineering, procurement and construction management services at the new Saudi Arabian facility.
Earnings for other companies in the aluminum business have improved relative to last year. Noranda Aluminum Holding (NYSE:NOR) reported third quarter 2010 operating income of $20.07 million, compared to a small loss in the same quarter of 2009.
The Bottom Line
Alcoa sees a boom in demand for aluminum over the next decade due to several macro trends that support this higher growth rate. The company is preparing for this through the expansion of capacity.
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by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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