Good Things Come in Aluminum Packages for Alcoa

March 7th, 2011 by Trefis Team
-2.54%
Downside
35.47
Market
34.57
Trefis
AA: Alcoa logo
AA
Alcoa

Alcoa (NYSE:AA) is the world leader in the production and management of primary aluminum, fabricated aluminum and alumina, and competes with other international metals and mining giants like Rusal, Rio Tinto (NYSE:RIO), BHP Billiton (NYSE:BHP) and Chalco (NYSE:ACH).

Its products are used worldwide in aircrafts, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, and industrial applications. The company also sells non-aluminum products including precision castings and aerospace and industrial fasteners.

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Our price estimate for Alcoa, at $17.68, implies a 7% premium to market price.

The Packaging Industry Drives Demand for Aluminum in a Big Way…

The packaging industry uses a significant quantity of aluminum. The metal’s light weight makes it ideal for making cans. Moreover, it is very convenient to use aluminum foil for wrapping and storing food. It is estimated that almost 20% of all aluminum produced is used for packaging. [1] With the global demand for the aluminum industry expected to reach 45 million tons by 2012, [2] it implies that almost 9 million tons of aluminum will be used for packaging by then.

Moreover, a few independent researches have recently shown that aluminum beverage bottles can actually provide insulation comparable to glass bottles. [3] Puzzling as this discovery is, it has the potential to boost the usage of aluminium by giving the metal access to the bottling industry which has been dominated completely by glass and plastic.

… But Will this Actually Translate to Any Benefit for Alcoa?

Any factor that can increase the demand for aluminum in the global market is bound to add value to all aluminum manufacturing companies world-wide, as it represents an increase in sales revenues. With Alcoa being the front-runner in the industry, this would represent a significant upside for the company in the years to come.

But in the recent past, all aluminum manufacturers have faced a threat to their profitability due to increasing focus on environmental sustainability. Aluminum production requires a substantial amount of electricity. In fact, electricity costs are second only to the cost of acquiring bauxite ore. This, combined with the fact that aluminum is 100% recyclable at a fraction of its manufacturing costs, has spawned an extremely profitable recycled-aluminum industry.

The increase in use of recycled aluminium is the U.S. is what most likely prompted Alcoa’s CEO Mr. Klaus Kleinfeld to predict flat growth in the usage of aluminum in the country for 2011. [4]

See our full analysis and $17.68 price estimate for Alcoa

We believe Alcoa’s primary metals sales figure could increase by as much as 10% by the end of our forecast period, pushing our estimated shipments to 5 million tons at that point. This would in-turn represent a 7.5% upside to our $17.68 price estimate for Alcoa, bringing our number to $19.

Notes:
  1. Uses of Aluminium, Greener-Industry, 2011 [↩]
  2. Rising Chinese Costs to Support Aluminum Prices, Bloomberg, Nov 22 2009 [↩]
  3. Study Reveals Aluminum Beverage Bottles Have Surprising Insulating Ability Compared To Glass, Packaging Industry News Articles, March 7 2011 [↩]
  4. Q4 2010 Earnings Transcript, Seeking Alpha, Jan 10 2011 [↩]