Alcoa Sees Positive Long Term Future For Aluminum

By Eric Fox | November 12, 2011 AAA

Alcoa (NYSE:AA) believes that positive long term fundamentals are still intact for the aluminum industry, despite recent concerns by investors regarding a slowing of global economic growth. This macro overview, and additional details on the company's strategy to take advantage of these fundamentals, was provided at an investor day recently held for the institutional investment community.
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Demand Growth
Alcoa expects demand for aluminum to grow at a rate greater than the historical trend lines, for the balance of the current decade. This growth will be led by China and the emerging economies of the world, as a large middle class develops in these countries over the next generation.

The world consumed 44 million tons of aluminum in 2011, up from 39 million tons in 2010. This demand will grow at a 6.5% compound annual growth rate (CAGR) and reach 73 million tons by 2020. (For more on CAGR, see Compound Annual Growth Rate: What You Should Know.)

This optimistic view of growth by Alcoa implies that demand for aluminum will grow at a 1.6 multiple of GDP growth from 2010 to 2020. During the 1980 to 2000 time period, demand for aluminum grew at a rate only 80% of GDP growth.

Other factors supporting higher annual rates of aluminum demand growth, include a rising world population and the trend towards urbanization. Also, greater concern for the environment, as reflected in increased regulation, encourages the substitution of light weight aluminum materials, in place of traditional materials.

Company Strategy
Alcoa has been working to reduce costs and move down the cost curve, on the refining and smelting side of the business. The company is looking to move refining costs from the thirtieth percentile in 2010, to the twenty third percentile by 2015. On the smelting side, Alcoa is attempting to get to the forty first percentile, down from the fiftieth percentile in 2010.

Alcoa has also set a goal of adding $4.1 billion in revenue to the company's base over the 2010 to 2013 time frame, along with an increase in EBITDA margins, as well. The Global Rolled Products segment is expected to add $2.6 billion over that time frame, as the company sees the most growth in the Aerospace and Automotive businesses. The Engineered Products & Solutions segment will add $1.5 billion over three years, with growth coming from market share gains and the introduction of new products.

Competitors
Alcoa competes globally against a number of domestic and international companies. Kaiser Aluminum (Nasdaq:KALU) serves the defense, aerospace and automotive industries and reported $1.2 billion in sales in the twelve months ending June 30, 2011. The company has more than a dozen manufacturing facilities spread across the United States and Canada.

Century Aluminum (Nasdaq:CENX) is headquartered in California and has facilities in the United States and Iceland. The company reported a GAAP loss of $6.6 million or 7 cents per diluted share, in the third quarter of 2011. This loss was caused mainly by an inventory adjustment recorded by the company during the quarter. (For more on GAAP, see What Are Some Of The Key Differences Between IFRS And U.S. GAAP?)

One company that is not that enamored with the aluminum business, is Rio Tinto PLC (NYSE:RIO), which recently announced that it would sell more than a dozen separate aluminum related assets. The company will focus its efforts in what it considers to be tier one assets in the business.

The Bottom Line
Alcoa is bullish on aluminum, as one might expect given the company's position in the industry. Howver, investors have been burned before, when relying on overly optimistic long-term growth rates, to justify a stock investment; caution should be exercised in this case, as well.

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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