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Investment Overview for Alcoa (NYSE:AA)
- Spin-off of value-added businesses
- Alcoa spun off its light metals engineering businesses (the value-added businesses of the undivided Alcoa Inc.) towards the end of 2016. The value-added businesses now constitute an independent company named Arconic. The undivided Alcoa's commodity businesses, primarily the manufacture and sale of aluminum, alumina, and bauxite, now constitute the business of the successor company, which carries the Alcoa name.
Below are key drivers of Alcoa's value that present opportunities for upside or downside to the current Trefis price estimate for Alcoa:
- Average Price of Aluminum Shipments: We expect realized prices for Aluminum shipments to recover sharply in 2017 as a result of an improved demand outlook and to rise at a moderate rate over the forecast period. We expect improving global economic conditions, particularly in the manufacturing and infrastructure sectors in China and the U.S., to drive the demand for aluminum and the prices of the commodity. If demand conditions improve faster than expected, prices may increase faster than currently factored into our estimates. In this scenario, if realized prices for the division reach $2,700 per ton by the end of the forecast period, instead of $2,560 per ton in the base case, it would represent an upside of 4% to our price estimate.
- Primary Metals EBITDA Margin: EBITDA margins for the Primary Metals division are expected to rise to 11.5% by the end of the forecast period, driven by an improved pricing environment and the company's efforts to boost the productivity of its operations. However, if the company is unable to realize these improvements in productivity, margin growth for the division will be lower than currently factored into our model. In this scenario, if margins rise to only 10.5% by the end of the forecast period, it would represent an 8% downside to our price estimate.
Alcoa is the leader in the production of aluminum products such as primary aluminum, fabricated aluminum, and alumina. The company is involved in every aspect of the industry including mining, refining, smelting, and recycling.
Aluminum products represent around 70% of Alcoa’s revenues; accordingly the company is heavily impacted by aluminum prices.
Alcoa operates in around 10 countries worldwide, including Australia, Brazil, the U.S. and European countries.
Bauxite is the primary ore used in alumina production whereas alumina is the primary ore used in aluminum production. The company also sells bauxite and alumina to third parties. Other major inputs used in Alcoa's operations include electric power, caustic soda, natural gas, petroleum coke and coal.
Aluminum division is most valuable for Alcoa
The Aluminum segment includes the company's production of primary aluminum and the production of cast products and rolled products using the metal. The division also includes the company's energy business.
Rolled products are sold directly to industrial customers in the packaging end market for the production of aluminum cans. Primary aluminum and cast products are used by other divisions within the company, with limited sales to third parties.
Improving demand conditions for aluminum:
Aluminum has diverse applications in industry. Thus the sales of aluminum are largely dependent on global economic growth. Improving global economic conditions are expected to boost the demand for aluminum and the prices of the metal. Developments in China and the U.S. are particularly important. China, the world's largest consumer of aluminum, is expected to witness a slowdown in GDP growth to 6% in 2018, from 6.7% and 6.5% in 2016 and 2017 respectively. In response, the Chinese government has instituted a fiscal stimulus, focusing on the infrastructure and manufacturing sectors. In addition, the U.S. government is planning an infrastructure revamp of its own, in addition to making efforts to boost manufacturing. These measures are likely to translate into better demand conditions for aluminum.
Relaxation of Indonesian export ban could dampen bauxite prices
As per the provisions of a law passed by its Parliament, the Indonesian government halted the exports of bauxite ore from the country in January 2014. The country intends to boost its domestic mineral processing capacity at the cost of exporting unprocessed mineral exports. Bauxite is the key mineral ingredient for the production of alumina. Indonesia used to account for 10-15% of global bauxite supply and was a major exporter to China, the world’s largest aluminum producer. A constriction of supply due to the Indonesian export ban has supported bauxite prices. However, Indonesia partially relaxed this ban at the beginning of 2017. Further relaxation of export regulations in the country could boost global supply and dampen prices.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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