Alcoa’s Titanium Joint Venture With VSMPO-AVISMA Will Bolster Value-Added Products Business
Alcoa (NYSE:AA) has signed a co-operation agreement with Russia’s VSMPO-AVISMA to target aerospace demand for high-end titanium and aluminum products. VSMPO-AVISMA is the world’s largest manufacturer of titanium ingots and forged products, and the agreement marks the first step towards the creation of a joint venture between the two companies.
Alcoa and VSMPO-AVISMA aim to manufacture high-specification products such as aircraft landing gear and forged wing components at Alcoa’s Samara facility in Russia. Alcoa is confident that the demand from the aerospace market will grow at a very fast rate over the next few years. The two companies want to complement each other’s strengths to grab a big slice of this opportunity. Alcoa has also consciously been working towards shifting its focus to downstream value-added products to mitigate the impact of volatile primary metal prices on its profits. [1]
We have a Trefis price estimate for Alcoa of $7, which represents 22% downside to the current market price.
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Alcoa’s Value Added Products
Alcoa manufactures value added products in two business segments: Global Rolled Products (GRP) and Engineered Products and Solutions (EPS). Both divisions meet the needs of the automotive segment, among others.
The GRP segment produces and sells aluminum plate, sheet and foil. Products in this segment include rigid container sheets, which is sold directly to customers in the packaging and consumer market and is used in the production of aluminum beverage cans. This segment also includes sheet and plate used in the aerospace, automotive, commercial transportation and building and construction markets.
The EPS division produces titanium, aluminum, and super alloy investment castings, forgings and fasteners, aluminum wheels, integrated aluminum structural systems, and architectural extrusions used in the aerospace, automotive, building and construction, commercial transportation and power generation markets. These products are sold directly to customers and through distributors. This division also manufactures hard alloy extrusions products, which are sold to customers in the aerospace, automotive, commercial transportation, and industrial products markets. [2]
Aerospace Is One Of The Two Key Focus Areas
Alcoa is targeting two segments in particular for its value-added products business- automotive and aerospace.
In the third quarter this year, after-tax operating income (ATOI) in the EPS division rose year-over-year from $158 million to $192 million due to productivity gains and higher sales volumes. The division reported a record adjusted EBITDA margin of 22.5%. Alcoa is upbeat about the aerospace market and maintained its 9-10% growth projection for 2013. The company touts a large backlog of 9,900 orders for planes with Boeing and Airbus which might take up to 8 years to clear. It signed orders worth $135 billion with these companies at the Paris Air Show in the second quarter. It is because of this huge opportunity that Alcoa is investing in building capacity to supply titanium forgings to these companies. The company’s annual aerospace business is already worth $3.8 billion, and the proposed joint venture will help it grow further. We expect the specialized nature of the joint venture’s products to boost EBITDA margins in Alcoa’s EPS business. ((Alcoa Q3 2013 Earnings Presentation, Alcoa Website))
Alcoa bought the Samara and Belaya Kalitva aluminium processing plants in Russia in 2005. Since then, it has invested more than $540 million in building facilities, including modern control technology for a forging press that remains the sole global source of some particularly large forging products. The titanium forgings that Alcoa and VSMPO-AVISMA aim to produce at Samara will thus be technologically difficult for any competitor to replicate in the short term. [3]
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Notes:- Alcoa and Russia’s VSMPO-AVISMA to Form Joint Venture, Serve Growing Global Aerospace Industry, Alcoa Press Release [↩]
- Alcoa 2012 10-K, SEC [↩]
- Alcoa set to be heavy player in Russian titanium, Alcoa Website [↩]