Alcoa’s Aluminium Supply Deal with Embraer Could be First of Many

Alcoa Inc. (NYSE:AA), the nation’s largest aluminum producer, recently announced that it inked a deal with Brazil-based Embraer S.A. (NYSE:ERJ), a leading manufacturer of commercial jets, to supply aluminum products for the company’s next-generation airliners. ^[1] Under the terms of the contract Embraer will use Alcoa’s proprietary alloys and advanced metallic technologies to help the aircraft maker develop high-performance fuselage and wing solutions for its family of jetliners. The news comes at an opportune time for Alcoa, which last summer launched new aluminum alloys that it says can lower the cost, weight and maintenance of aircraft compared with the composites currently used.

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Metals Market Soft

That said, the Embraer deal is one bright spot in an otherwise dreary period. In recent months, global economic concerns have slowed aluminum demand in the construction, industrial products and packaging sectors. Meanwhile, slumping metal prices put a damper on Alcoa’s third-quarter profits, which rose over the year-ago period but fell short of Wall Street expectations. The price of Aluminum nosedived 20% in the quarter and the aluminum giant’s stock followed suit, tumbling 41% during the same period.

The Future of Aluminum… and Alcoa

Alcoa expects continuing strong aluminum demand from aerospace and automotive customers as the economy slowly gains its footing, predicting a 12% uptick in demand this year and that global consumption of the lightweight metal will double by 2020. Aluminum prices could recover sooner rather than later if confidence is restored in the lumbering U.S. economy and Europe’s ability to resolve its deepening debt crisis.

And despite concerns by consumers and investors of a less-than-rosy outlook for economies on both sides of the Atlantic, there are favorable long-term fundamentals in the aluminum market driven by growing demand in robust sectors and emerging markets. Considering that, along with Alcoa’s size, strength and innovative products, there is every reason to believe that the aluminum producer’s business supports Trefis’ price estimate of $16.

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1. Alcoa, Embraer S.A. Sign Technology Sharing Agreement To Develop High-Performance Aircraft, Alcoa press release, Nov. 17, 2011 [↩]