Alcoa Cuts Capacity But China & Autos Drive $12 Value

by Trefis Team
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Aluminum manufacturer Alcoa (NYSE:AA) is going through a rough patch as its profitability has taken a beating lately due to falling alumina prices arising from oversupply of the commodity. Alcoa is a major global producer of aluminum and related products and could play a vital role in bringing prices back to previous levels if it continues to cut capacity. In April, Alcoa announced that it would cut or curtail nearly 390K tons in refining capacity and might have to cut more assessing the market, going forward.

Our price estimate for Alcoa stands at $12, implying a premium of close to 20% to the current market price.

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Cut in capacity

In April, Alcoa announced that it would curtail 390K ton of refining capacity in the Atlantic region, which represents almost 50% of its annual global capacity of 18 million ton. [1] This trend of capacity cuts is expected to continue in the near future until the aluminum prices recover. The revival of alumina prices will be critical for Alcoa as it derives nearly 25% value from the Alumina segment.

Automotives, China to drive growth

Alcoa sold about 12% of its flat-rolled products to the automotive industry in 2010, according to Morgan Stanley estimates. [1] The automotive industry has been looking for new materials that can replace steel to increase fuel efficiency of the vehicles. [2] Aluminum fits the deal quite nicely as it is a lighter metal and has comparable strength to steel. Increased usage in the automotive industry could see aluminum demand rise in the future.

Emerging markets such as China hold the key to growth as demand for midstream products like flat-rolled aluminum will increase, going forward. Hence the company has planned to restructure its midstream flat-rolled products’ business into a more market-driven structure by dividing the division into 5 recognizable segments:  Aerospace, Ground Transportation, Packaging, Consumer Electronics and Defense. This will help the emerging markets closely associate with the distribution facilities of Alcoa. If Alcoa is able to capitalize its exposure to China, it will be a major driving factor in the future.

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Notes:
  1. UPDATE 2-Alcoa cuts alumina output as oversupply dents prices, reuters.com, April 5, 2012 []
  2. Goodyear replaces Steel core with lighter Aluminum in aviation tyres, commodityonline.com, May 24, 2012 []
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Alcoa Logo
  • commented 10 years ago
  • tags: AA MT NEM FCX
  • The smart money know that but they are bidding their time... Buy ALCOA before they do... Jump in and bid up and make life miserabl;e for smart money folk now!!
    Alcoa Logo
  • commented 10 years ago
  • tags: AA MT NEM FCX
  • The problem is we are now retooling for massive switch to aluminium from copper and steel rightnow..
    Alcoa Logo
  • commented 10 years ago
  • tags: AA MT NEM FCX
  • ALCOA AT $100 !! NOT $12!!! HEEHAW! aluminium will replace so much of copper and steel we know ... so much that will blow your minds away! in the coming decade.. General Electric and Boeing is sweating bullets now.. worried that aluminium prices will take off and put a huge dent on their earnings to the chagrin of shareholders... Ditto for Coca Cola and Warren Buffett.. Warrren Buffet will cry for first time in 70 years!!!!
    Alcoa Logo
  • commented 10 years ago
  • tags: AA MT NEM FCX
  • it is understandably difficult to switch from steel to aluminium because steel costs only $400 a ton while aluminium is $2000 a ton.. Look , copper is already $7500 a ton!!! Copper used to be at $2000 a ton ten years ago.. Aluminium should be at $4000 a ton.. or higher.. Aluminium save a lot of energy when recycled while steel cannot. Maybe govenrments should help industries buy aluminium instead of helping alumiium producers produce too much aluminium.. I dont care how many tons we need as long as we get a fair price for every ton that is $4000 or more.. I can let industries rationalize how much aluminium to use instead of letting blind dumb aluminium produce too much alumininium and too much electricity needlessly!!
    Alcoa Logo
  • commented 10 years ago
  • tags: AA MT NEM FCX
  • Manufacturers that consider switching to alumininium has to plan ahead for inevitable rise in aluminium prices.. There is no question about that.. Aluminium should be above $2 instead of only $1 today.. Aluminium prices are just jokes !! it has to go up now! ALCOA cannot unlaterally cut production while the rest of the world continue to rely on subsidies from governments to go full blast at loss.. China has to shut down many smelters .. Europe , too. Still , aluminium at $1 a pound is a joke .. But industries are counting on cheap aluminium which is unrealsitic !! Use aluminium now!