Here’s Why Alcoa Could See A Sharp 30% Slide In Its Aluminum Market Share

Aluminum is one the worst affected commodities due to the spread of coronavirus. Aluminum prices have dropped from about $1,820/ton in January 2020, to $1,670/ton in March 2020, with the ongoing spread of the virus, which has affected industrial activity and demand. All aluminum miners have already faced a difficult 2019 due to a subdued pricing environment, with 2020 expected to be worse. However, Alcoa is likely to be the most affected among the lot, with Trefis expecting Alcoa’s market share in the aluminum sector to come down from 26.7% in 2019 to about 18% in 2025. View our complete dashboard analysis – How Much Market Share Is Alcoa Likely To Lose By 2025?–  to understand the factors leading to such a sharp drop in market share for the aluminum giant.

Note: For this analysis, Aluminum market consists of the top 3 aluminum mining companies

Takeaway

• The Aluminum market is dominated by three major players with Rusal leading the pack with revenues of over $8.0 billion in 2019.
• While Rio Tinto and Alcoa are behind with revenues $7.1 billion and $5.5 billion, respectively, Alcoa’s new operating model under which it plans to divest some of its aluminum assets over the next 5 years, is expected to lead to a sharp drop in Alcoa’s market share compared to its rivals.
• Additionally, with lower output, Alcoa will not be in a position to take full advantage of an aluminum price uptick expected from 2022, whereas Rusal (with sanctions on it being lifted by the US) and Rio Tinto are likely to eat into Alcoa’s market share, which is expected to decrease from 26.7% in 2019 to about 18% by 2025.

Current Market Size

• The top players in the aluminum space generated around $20.7 billion in revenues over 2019, posting a y-o-y decline of about 15.8%.
• Market size has decreased from $21.6 billion in 2015 to $20.7 billion in 2019, marking a decline of 4.5% during this period, with most of the decrease coming in 2019 due to lower output and decline in prices. However, the market size is expected to increase by 6.5% to $22 billion by 2025.
• Though aluminum market size is expected to grow by 6.5% from the current level through 2025, Alcoa’s market share is likely to see a sharp decline of 32%, from 26.7% in 2019 to 18% by 2025, primarily due to lower volume (as the company plans to sell part of its aluminum assets), partially offset by higher global price level.

Below we explore the volume, price and revenue forecast for major aluminum companies, and see how Alcoa’s market share is falling

Volume Trends

• Rusal leads the aluminum mining market with respect to volume sales, with about 4.2 million tons of aluminum sold in 2019, followed by Rio Tinto which sold 3.2 million tons in 2019. Alcoa’s aluminum shipments were much lower at 2.9 million tons in 2019. Lower output was mainly due to disruptions at Alcoa’s Spanish operations.
• Almost all companies, except Alcoa, are likely to see their aluminum volume increase from 2019 to 2025.
• Alcoa’s volume sales could go down from 2.9 million metric tons in 2019 to 2.0 million metric tons by 2025, in the absence of any major deal during this period.
• The primary factor driving lower shipments is a drop in production on account of the company’s new operating model, under which it has placed about 1.5 million metric tons of aluminum smelting capacity under review, part or all of which could be sold in the next 5 years. Additionally, slowdown in industrial activity and demand for aluminum due to the spread of coronavirus is likely to lead to lower volume sales in the near term
• Rusal’s aluminum shipments are likely to increase from 4.2 million metric tons to 4.3 million metric tons between 2019-2025, while Rio Tinto is likely to see an increase in shipments from 3.2 million metric tons to 4.0 million metric tons during this period.
• Thus, Alcoa is set to underperform its rivals by a huge margin and decrease its volume sales in the medium term.

Price Trends

• Price realization has largely decreased for all companies over the years. Price realization was higher in 2018 due to lower supply of aluminum, whereas prices dropped in 2019 as China started dumping semi-fabricated aluminum at lower prices, thus driving prices of primary aluminum even lower. Rio Tinto commands the highest price for its product due to its value-added features, whereas Rusal’s price realization is slightly lower than Rio Tinto. Alcoa’s product realizes the lowest price among the top 3 players.
• Price realization is expected to see a downturn in the near term due to lower demand from industries following the outbreak of coronavirus in early 2020. Prices are expected to rebound only in 2022, to rise steadily through 2025.
• Alcoa’s price realization is expected to be lower than its rivals (in line with historical trends) in the absence of any value-added feature for its output, unlike Rio Tinto.
• Alcoa’s price realization is expected to improve from $1,928/ton in 2019 to $2,000/ton by 2025, much lower than Rio Tinto’s expected price realization of $2,300/ton in 2025.
• Thus, Alcoa’s output is likely to see lower growth in prices compared to its rivals.

View our complete dashboard analysis to understand movement in Aluminum prices historically and factors driving it – Aluminum Prices: 15-Year Price Performance And Production-Demand-GDP Analysis.

Drop in Revenue and Market Share

• Alcoa is expected to see a decline of 27.4% as its aluminum revenue is likely to decrease from $5.5 billion in 2019 to $4.0 billion in 2025. Rio Tinto and Rusal could see a healthy growth in revenue base, eating into Alcoa’s market share. Alcoa’s market share in the Aluminum market is expected to fall from 27% in 2019 to reach 18% by 2025.
• This compares with Rio Tinto’s projected Market share increase from 34.6% in 2019 to 42% in 2025; and Rusal’s projected market share increase from 38.8% in 2019 to 40% in 2025.
• Rio Tinto and Rusal are expected to take advantage of higher global prices and higher output in the medium term, whereas Alcoa is likely to rapidly lose its significance in the aluminum space with about 1.5 million metric tons of its aluminum capacity under review, part of which could be sold in the next 5 years.

Thus, Alcoa, with a much lower market share in the medium term, is likely to become a fringe player in the aluminum sector, in the absence of any big deal or major capacity expansion.

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