How Much Could Alcoa Add To Its Aluminum Revenue Over The Next 5 Years?

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After its split to form two separate entities – Alcoa and Arconic – in 2016, in spite of volatility in global aluminum prices, Alcoa (NYSE: AA) successfully added about $0.7 billion to its aluminum business over the last three years, increasing the segment revenue base from $6.5 billion in 2016 to $7.2 billion in 2018. Trefis estimates that revenue over the next two years would remain subdued due to a decline in global aluminum prices (with rising exports from China), exacerbated by lower aluminum shipments with the expiration of the Tennessee tolling agreement in December 2018, under which Arconic supplied can sheet products for certain customers of Alcoa. However, beyond 2020, revenue growth could be driven by strong demand from end markets and pick up in global price levels which could help Alcoa add about $1 billion to its aluminum revenue over the next five years (2019-2023).

You can view the Trefis interactive dashboard – How Much Could Alcoa Add To Its Aluminum Revenue Over The Next 5 Years? – and modify the key drivers to arrive at your own volume, price, and revenue estimates for the company. In addition, here is more Materials data.

Historical Shipment and Revenue Trend Vis-à-vis End Market Performance

  • Alcoa’s primary end markets – automobile and housing construction – witnessed a steady increase from 2016 to 2018.
  • However, after increasing in 2017, Alcoa’s aluminum shipments decreased in 2018, driven by a drop in production output due to expiration of certain sale agreements, operational curtailments, and strikes.
  • However, in spite of lower shipments, aluminum revenue increased in both years – 2017 and 2018, led by an increase in price realization per ton, with global aluminum prices increasing on the back of a supply deficit.

Forecasting Global Aluminum Market Shipments

  • Trefis estimates total global vehicle sales (commercial vehicles + passenger cars) to increase from 98 million units in 2018 to 108 million units by 2023, growing at a CAGR of 2%.
  • With an average aluminum usage of about 0.4 ton per vehicle, the total aluminum shipments to automobile manufacturers is expected to grow at a CAGR of 2% to 43.2 million tons by 2023.
  • Rising aluminum demand from EV players is likely to be partially set off by decreasing sale of non-EVs. However, automobile is expected to remain the largest end market for aluminum players, contributing about 30% of the global aluminum demand.
  • Steady growth in this end market is expected to lead to global aluminum shipments increasing to 144 million tons by 2023, from about 131 million tons currently.

Forecasting Alcoa’s Aluminum Shipments Over The Next 5 Years

  • Trefis estimates Alcoa’s aluminum shipments to decline from 3.3 million tons in 2018 to about 3 million tons in 2019.
  • The expiration of the Tennessee tolling agreement is expected to reduce aluminum shipments by 0.5 million tons in 2019. Though, growing global demand would partially offset this decline.
  • However, from 2020, shipments are expected to gradually increase, driven by expectations of improving end market performance and higher production with the company’s focus on asset quality.

Price Realization

  • Alcoa’s aluminum price realization has largely moved in tandem with global price levels, except in 2017, where the realized price declined in spite of a rise in global prices, mainly due to lower grades mined.
  • Historically, Alcoa’s price per ton sold has been at a premium to global prices, due to the sale of rolled aluminum which fetches a higher price compared to primary aluminum.
  • We expect price realization to remain subdued over the next two years, due to weakening in the global price trends.
  • Aluminum prices have fallen from about $1,974 per ton in December 2018 to about $1,855/ ton currently. Though the management forecasts a year of aluminum supply deficit, it is not reflecting in pricing due to a continuous rise in Chinese aluminum exports, which have exceeded 500 kmt in seven of the last eight months.
  • China is a leader in semi-fabricated products and a major exporter. As increasing number of steel players are shedding capacity and demand from Chinese automobiles being modest, China has increased its exports of semi products at a lower price, which has in turn led to a decline in primary aluminum products worldwide.
  • However, with a pickup in EV sales and rising construction and industrial activity, price realization is expected to improve from FY-2021, to reach approximately $2,290/ton by FY-2023.

Forecasting Alcoa’s Aluminum Revenue

  • Though revenue is expected to remain subdued in 2019 and 2020, higher shipments and price level is expected to drive revenue growth beyond 2020.
  • Thus, as per Trefis’ estimates, Alcoa is expected to add about $1 billion to its aluminum revenue, which is expected to increase from $7.2 billion in 2018 to $8.2 billion 2023.

 

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