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Alcoa (AA)Stock (Aluminum Industry, Manufacturing Industry)
 Alcoa (AA) is the world's largest aluminum manufacturer. Although the company has researched a possible diversification of its product line into other metals such as titanium and magnesium, the company believes that metal diversification will not add value. In 2007, the company generated over $30.7 billion in sales of several different aluminum products. Alcoa sells products that range from base metal aluminum to sheet for cans to turbines for jets. The company has a very positive outlook on the future of the aluminum industry and is currently planning to dedicate an estimated $10 billion over the next 5 years to expansion projects in an attempt to capitalize on its expectations. While most of Alcoa’s production is in the United States, it is a global company with projects in 44 countries. Alcoa supplies most of the raw materials needed to make primary aluminum and higher level aluminum products with several mining interests and refineries across the globe. The company's strategy is to integrate its upstream operations such as alumina refinement and aluminum production with its downstream operations such as auto-part and aluminum foil manufacturing. Integration helps protect Alcoa from fluctuating market prices for alumina and aluminum.
[edit] Company DescriptionAlcoa makes variety of products out of upstream and downstream businesses. Of the $30 billion that Alcoa generated in revenue in 2006, 40% was from sales in the United States. Alcoa is currently planning to expand its operations considerably. The company is looking to increase its alumina refining capabilities by expanding its current projects in Jamalco and Alumar as well as creating new plants in Guinea, Ghana and China. Alcoa is expanding its aluminum smelting capacity with a new plant in Iceland and expansion of its Trinidad project. The company has expanded its downstream production through several acquisitions. Alcoa has increased its production of several products like aluminum extrusions, engineered products, and aerospace products. Recent acquisitions include Alumax, Fairchild Fasteners, Ivex Packaging and Cordant Technologies. 2007 annual sales reached an all time high of $30.7 billion, up from $30.4 billion in 2006. The firm also generated $2.6 billion in income from continuing operations, another Alcoa record. Negative themes of 2007, which are expected to continue in 2008, are higher energy costs, unfavorable currency effects as the dollar declines (costing roughly $30 million in 2007), a declining U.S. automotive industry, and delays in the Boeing 787 and Airbus 380. High growth in emerging markets, especially China and Russia, should continue to more than offset minimal growth in Europe and decline in America. The company’s primary business sectors are:
Aluminum and aluminum based chemicals are produced from alumina, which is a powdery oxide of aluminum that is refined from bauxite ore. Alcoa is the world’s largest alumina producer, refining 15.1 megatons in 2006, or about 23% of the global market share. Alcoa also controls 26% of the bauxite production in the world, with several mining interests for the metal around the world. The company has enough reserves of bauxite to supply the refining process of alumina for several decades. Of the 15.1 megatons of alumina produced by Alcoa, 55% of it was sold to outside consumers in 2006. Alcoa is able to supply the majority of aluminum necessary to create upper level aluminum products as well as sell it as a primary metal to consumers. The company has a total of 26 aluminum smelters worldwide that can produce 5 million metric tons of aluminum per year. In 2006, $4.6 billion was generated through the sale of primary aluminum.
Alcoa is the world’s second largest producer of flat-rolled aluminum products with a 16% market share. The company is the leader in the United States with a 31% market share. Flat rolled products include aluminum sheet, tin and foil. 45% of flat-rolled products go to the canned beverage industry as rigid container sheet used to make cans. Other end markets for these products include the aerospace, automotive, and construction industries. Flat-rolled products typically make up $8 billion in revenue, representing about 10% of Alcoa’s earnings
Alcoa makes both forged and extruding aluminum products that are used in the aerospace, automotive, commercial transport and industrial gas turbine markets. The aerospace and automotive industry both receive one-third of this sector's sales. In 2005, Alcoa did $5 billion in sales from Engineered Solutions.
This sector produces both hard and soft alloy extrusions, architectural extrusions and vinyl siding. Over 50% of the products from this sector go to the building and construction markets. This sector has the lowest profit margins of the entire company and is currently being restructured by Alcoa to address this.
This sector is made up of the Reynolds Aluminum Foil franchise, BacoFoil, rigid and flexible plastic packaging, plastic beverage packaging and closures. 60% of the $3.1 billion in sales made from this sector are to the food and beverage markets. After exploring options to improve performance in this sector through restructuring and divestitures, Alcoa agreed to sell this segment to New Zealand's Rank Group Ltd. for $2.7 billion in cash. The sale of this segment is expected to be completed by the end of the first quarter of 2008. The segment had about 10,000 employees in 22 countries. [edit] End MarketsAlcoa’s supplies several end markets with a wide variety of products. The following industries make up some of the more important markets. [edit] AerospaceAlcoa provides several products used in the manufacturing of aircraft which include airfoils for jet engines, alloys for the fuselage, wings, landing gear and wings. The upswing in this market due to increased production from both Boeing Company (BA) and Airbus (EADS) bode well for future sales. Alcoa is a large supplier to both companies and recently agreed on a $2 billion deal with Airbus. Alcoa is also focusing on research and development in an effort to decrease the weight and costs of its products in order to compete with the use of carbon alloys and other materials in planes. [edit] AutomotiveAlcoa provides several engineered automotive components such as wheels, suspensions and electronics as well as full vehicle body structures and advanced electrical systems. Because of an increased global emphasis on the weight reduction and fuel efficiency of automobiles, aluminum use in this sector has increased greatly over the past 15 years. However, recent struggles by the Big 3 Auto Woes, Ford Motor Company (F), General Motors (GM) and Daimler Chrysler (DCX) has caused them to both decrease auto production as well as decrease the use of aluminum as a manufacturing component in favor of cheaper steel. Because of this, Alcoa is aiming to expand its presence in China in order to take advantage of the growing market shares of Toyota Motor (TM), Nissan Motor (NSANY), Honda Motor Company (HMC) and Hyundai. Alcoa opened its first office in China in 1993 and currently operates 17 manufacturing facilities there. [edit] Packaging Division Sold at end of 2007Alcoa produces the aluminum used in the bodies of an estimated 30 billion cans and 43 billion can heads each year. Global demand for aluminum for canned beverages has increased over the past few years. Specifically in the U.S. aluminum can consumption grew 2.3% to 101 billion behind the increased demand for beer and energy drinks. Alcoa’s other packaging businesses, such as its Reynolds Aluminum Foil franchise, have suffered from low profit margins and inefficient production methods. As a result, Alcoa sold the segment that makes Reynolds Aluminum Foil at the end of 2007. [edit] Alumina55% of Alcoa’s in-house alumina supply in 2006 was sold under contract to third parties. While the company is able to insulate its aluminum production from alumina market price fluctuations, Alcoa’s alumina sales are still subject to market rates. The price of alumina is related to the global refining capacity of alumina and global primary aluminum capacity. If global alumina refining capacity becomes much greater than primary aluminum production capacity, there could be an oversupply of alumina and a consequent drop in prices. Lower production in China and Russia and difficulty in exporting out of Indonesia led to hikes in prices in the third quarter of 2007, good news for Alcoa. [edit] Primary AluminumAlcoa’s primary aluminum sale profit margins are affected by the company’s position on the metal’s production cost curve. Energy, transportation and raw material make up the main costs of primary aluminum production, a lower margin between these costs and the price of aluminum means lower profits. An ongoing concern for Alcoa has been the increasing price and growing scarcity of energy for its smelters in the United States. In 2005, margins experienced a sharp drop before normalizing again the following year. Drivers for primary aluminum prices include the global production capacity of the metal, as well as economic development. With new supply growth in China and elsewhere around the globe, the aluminum market may reach a surplus, putting downward pressure on prices. However, aluminum consumption in economically developed countries has proven to be sustainable for very long periods of time. As more countries, including China, become developed economies, aluminum demand will remain strong. Alcoa has a very positive outlook on the future of the aluminum industry, and therefore has ambitious expansion goals. Below is a chart detailing some of Alcoa's revenue: [edit] Current State - Segment Sales
Source: Alcoa's 2006 Annual Report [edit] Other Drivers[edit] Energy CostsThe cost of aluminum production for Alcoa is relatively high because of the company's energy costs. Alcoa supplies around 25% of its own energy, has another 25% of the supply linked to long term contracts and buys around 50% of the energy used by the company at spot energy prices. Because most of Alcoa's smelting operations are located in the United States, where energy prices are higher on average than elsewhere, Alcoa is at a cost disadvantage compared with other global aluminum producers. However, in spite of the high energy cost, Aloca smelting operations in the United States have an uninterrupted supply of energy. [edit] China's ImpactChina plays a large role in the global demand of both aluminum and alumina. The country's rapid economic growth has fueled the need for aluminum and has therefore increased demand for alumina. Because alumina production in China is costly due to high energy prices and low quality bauxite reserves, alumina imports have been very important. The world's spot alumina prices are therefore driven mainly by Chinese demand. An increase in Chinese domestic production of alumina could have a negative impact on alumina producers. Because of the high price of alumina and scarcity of energy in China, aluminum production in the country is very costly. While the country is the world's largest aluminum producer and a net exporter of the metal, cost pressures could change this and move the country back into a net importer position. Many analysts expect China will likely be a net aluminum importer by the end of 2008.[1] Countries that remain developed for longer have a sustained and increased demand for aluminum, so China's developing economy is expected to maintain its current demand levels. [edit] CyclicalityThe aluminum industry is a cyclical one meaning that spot aluminum prices rise and fall due to speculation and supply imbalances. Alcoa in particular is exposed to these price fluctuations because 60% of the primary aluminum produced by the company is sold externally at these spot prices. A global oversupply of aluminum could hurt the company's profit margins as the spot price of aluminum would fall. Moreover, because the company is expanding its primary aluminum production, it is leaving itself even more exposed to aluminum price volatility. [edit] CompetitionAlcoa is a dominant player in the aluminum industry. Several new aluminum industry players have recently emerged in Russia, China, India and the Middle East. These companies have been gaining global market share. Alcoa's response to this has been an aggressive acquisitional business strategy. What separates Alcoa from the other major aluminum companies around the world is its integrated business strategy and ambitious plans for expansion. On May 7th, 2007, Alcoa announced a bid for Alcan (AL), another global producer that is centered in Canada. One thing keeping Alcoa from improving its profit margins is the company's relatively high position on the aluminum production cost curve. Unlike Alcan, which has a very favorable cost position due to a technological production advantage and a reliance on cheaper energy sources, Alcoa is faced with production inefficiencies and high energy costs. Furthermore, Alcan is better positioned to absorb aluminum price fluctuations and is more internationally diversified, meaning that they make more sales outside of the United States than Alcoa does. This helps to explain why Alcan's stocks have recently outperformed Alcoa's. Below is a table detailing the alumina and aluminum production capabilities of Alcoa and some of its main competitors.
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