Tickers in this Article: AA, FCX, AWC, ACH, RIO, KALU, DOW
It is almost hard to believe that Alcoa (NYSE:AA) shares went for about $5 a share in early 2009, but that was the depth of pessimism about global growth. Since then, investors are a lot more positive on the fortunes and future of aluminum, but the question remains whether Alcoa can continue to reward its supporters.

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A First Quarter That Didn't Quite Make It
Alcoa had a decent quarter and pricing in the aluminum market is getting better, but things were not quite as good as analysts had hoped. There was a big spread in analyst estimates (about $1.1 billion), and though Alcoa only missed the average by a relatively small amount, the company was clearly a ways off the high end of the range. Profitability was solid and on target, but that only seems to matter when it's significantly better or worse than analysts hope.

It really was not a bad quarter, though. Sales were up 5% from last year (and up 22% sequentially), and EBTIDA snapped back to the tune of 22% sequential growth and 60% annual growth.

Growth was pretty well balanced across the board. Production in alumina and primary metals was not that robust, but the profitability improvements were solid. Looking at flat roll and engineered products, shipments, sales and profits were all fairly strong, and it looks the company saw very good performance in China and Russia. (For more, see Alcoa: It's All About China Now.)

Will Substitution Drive Even Higher Prices?
With copper prices already high and steel resuming an upward march there is more and more talk of aluminum replacing copper and steel in a number of applications. It's a good story, but nothing that Freeport McMoRan (NYSE:FCX), Arcelor Mittal (NYSE:MT) or Nucor (NYSE:NUE) really need to fret obsessively about right now.

The substitution effect takes time and there are tradeoffs in performance, reliability and so on. So it's true that metal consumers are looking at their options and that persistently high copper prices will drive some changes, but it's also true that more copper supply is coming on to the market and Alcoa is not going to see a near-term demand boom because of substitution.

End-User Markets Looking Strong
There are plenty of markets that use large amounts of aluminum absent any substitution effect - after all, aluminum is strong and light relative to steel, and that's attractive to aerospace and transportation companies. To that end, the demand from customers like Boeing (NYSE:BA), EADS, General Dynamic (NYSE:GD) in aerospace and Ford (NYSE:F), Daimler, Caterpillar (NYSE:CAT) and more in automobiles, trucks and heavy machinery is definitely helping the price environment.

Elsewhere, there is very solid growth in emerging markets. Growth here is driven more by construction than in developed markets, but there is not much sign of prolonged slowdowns in growth in countries like Brazil, China and Indonesia.

The Bottom Line
Solid pricing and end-user demand in alumina can be seen as good news for Alumina (NYSE:AWC), but investors should be cognizant of some of the currency risks there. Other follow-on plays for aluminum include China's Chalco (NYSE:ACH) (though be wary of the heavy involvement of the Chinese government in the aluminum industry), Rio Tinto (NYSE: RIO) and Kaiser Aluminum (Nasdaq:KALU). Investors may also want to explore input providers like Dow Chemical (NYSE:DOW), Olin (NYSE:OLN), PPG (NYSE:PPG) and Occidental (NYSE:OXY), but realize that none of those companies are anything like pure plays to the aluminum industry.

As for Alcoa, it is a difficult call. It seems entirely plausible that a sustained economic recovery will allow Alcoa to recapture (or at least approach) prior peak sales levels. If that happens, it stands to reason that the shares can work back into the $30s and maybe into the $40s. It won't be anything like a smooth ride, though, so investors should consider how much volatility they want in the pursuit of a double. (For related reading, check out Value In Aluminum.)

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