Alcoa Announces Refining Capacity Curtailments As Portfolio Transformation Continues

March 25th, 2015 by Trefis Team
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Alcoa (NYSE:AA) has announced plans to curtail 443,000 metric tons per year of alumina refining capacity at its Suralco refining operations in Suriname. [1] This step is a continuation of the company’s strategy to reduce high-cost smelting and refining capacity, as it shifts focus towards its value-added businesses. The company had recently announced the review of 500,000 tons per year of smelting capacity and 2.8 millions tons per year of refining capacity for possible curtailment or divestiture. [2] The curtailment of the company’s Suralco operations is expected to be completed by the end of April. [1]

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Portfolio Transformation

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Aluminum prices have weakened considerably recently, primarily due to weak economic conditions in China, the world’s largest consumer of the metal. Chinese economic growth is expected to slow to 6.8% in 2015, as compared to 7.4% in 2014. [3] LME aluminum prices averaged roughly $1,800 per ton so far in Q1 2015, as compared to $1,950 per ton in Q4 2014. [4]

The Global Rolled Products (GRP) and the Engineered Products and Solutions (EPS) divisions constitute Alcoa’s value-added business segments. The GRP segment is mainly involved in the production and sale of aluminum plate, sheet, and specialty foil. This segment’s products are sold to customers in packaging and consumer goods, aerospace, automotive, brazing, building, and the construction industries. The EPS segment’s products include titanium, aluminum, and superalloy castings, fasteners, aluminum wheels, integrated aluminum structural systems, architectural extrusions, forgings, and hard alloy extrusions. These products are sold to customers in the aerospace, automotive, building and construction, commercial transportation, and power generation industries. The fortunes of the company’s upstream aluminum and alumina production businesses are to a large extent dependent on aluminum prices. To lessen its dependence on aluminum prices, the company has shifted its focus towards value-added products. The company is focusing on the aerospace and automotive segments and has made several investments and acquisitions over the past year to cater to customers in these segments.

Alcoa’s shift towards value-added products is reflected in its revenue figures. The percentage contribution of the GRP and the EPS segments sales to the company’s total revenues has steadily increased. This figure stood at 52.1%, 54.4%, 55.7%, and 56.4% in 2011, 2012, 2013, and 2014, respectively. [5] [6] In calculating these figures, we have only considered third-party sales.

With the latest curtailment of smelting capacity and more curtailments in the works, the share of value-added businesses in Alcoa’s revenue mix is set to rise in the years to come.

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Notes:
  1. Alcoa Continues Reshaping Upstream Business, 443,000 Metric Tons of Suralco’s Refining Capacity to be Curtailed, Alcoa News Release [↩] [↩]
  2. Alcoa Continues Transforming Upstream Portfolio, Announces Strategic Review of Smelting and Refining Capacity, Alcoa News Release [↩]
  3. World Economic Outlook January Update, IMF [↩]
  4. LME Aluminum Prices, LME [↩]
  5. Alcoa’s 2013 10-K, SEC [↩]
  6. Alcoa’s Q4 2014 Earnings Presentation, Alcoa Website [↩]