Will Alcoa Be Tarnished by Falling Prices?

As rising costs and lower prices pressure aluminum producers, Alcoa (NYSE: AA  ) said it is shuttering two more smelting operations in Brazil, which follows its closure of a smelter in Australia last month and others in the U.S., Canada, and Italy last year.

Alumar smelting facility, Sao Luis, Brasil. Source: Alcoa.

All across the industry, producers are reducing capacity to account for depressed pricing despite heightened demand. The world's largest aluminum producer, Rusal, has also been closing smelters and announced it was cutting production, saying output will likely fall to 3.5 million tons this year, down from 3.9 million tons in 2013. Similarly, Rio Tinto (NYSE: RIO  ) said in December it was closing its Australian smelting operation and shelving plans for an aluminum plant in Paraguay.

Last May, Alcoa put some 460,000 metric tons of smelting capacity under review, but its pullback has actually been more severe, as this latest announcement means capacity will be reduced by 800,000 metric tons, or some 21% of the total, when the shutdown is finished in May. After hitting a high of around $2,800 per metric tonne in 2011, alumina pricing has tumbled sharply and now trades for around $1,682 per metric tonne, its lowest level in four years, as an inventory glut maintains downward pressure.

5 Year Aluminum Prices-Aluminum Price Chart


Alcoa says its actions are consistent with its stated goal of lowering its position on the world aluminum production cost curve to the 38th percentile and the alumina cost curve to the 21st percentile by 2016. In comparison, Rio Tinto says it has an industry-leading cost position for aluminum smelting and is moving into the second quartile of the cost curve for alumina refining.

Still, China's smelters are delaying taking shipments and cutting spot imports as banks there crack down on lending to industries from aluminum to steel by as much as 20%, while also cutting production. The country is awash in alumina, and the moves are seen as a means of stabilizing the domestic industry, but top Chinese aluminium producer China Hongqiao Group says at least 30% of capacity will need to be taken from the market over the next three years. That's going to rebound on global producers such as Alcoa and BHP Billiton (NYSE: BHP  ) , which reported in January that alumina production over the previous six months improved 8% to a record 2.6 million tonnes.

Despite the reductions Alcoa is making, it's still pushing ahead with plans for building a low-cost smelter in Saudi Arabia, which is expected to have capacity of 1.8 million metric tonnes per year. So perhaps we should take all these production and capacity cuts the miner is announcing with a grain of salt. Even though they've made steep reductions at certain facilities around the world, capacity elsewhere is still expanding.

It seems much faith is still being placed on having China come to the rescue, but with its economy slowing faster than analysts expected, Alcoa may need to curtail expansion everywhere instead of in the piecemeal fashion it's currently doing.

Boost your 2014 returns with The Motley Fool's top stock
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2897773, ~/Articles/ArticleHandler.aspx, 9/2/2015 10:46:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


Today's Market

updated 1 hour ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:01 PM
AA $9.32 Up +0.10 +1.08%
Alcoa, Inc. CAPS Rating: ****
BHP $34.92 Up +0.84 +2.46%
BHP Billiton Limit… CAPS Rating: ***
RIO $35.20 Up +0.88 +2.56%
Rio Tinto plc (ADR… CAPS Rating: ***