Materials giant Alcoa (NYSE:AA) has been on a tear over the past few months. Since being booted from the Dow Jones Industrial Average, it's had the last laugh as its stock price has climbed considerably in a relatively short amount of time. A lot of optimism is built into Alcoa's rally based on firming aluminum prices and the prospect of a steady global economic recovery.

At the same time, there may be cracks forming in Alcoa's bull case. Why? Well, it's still grappling with high costs and inconsistent profitability. These may be compounded going forward now that Alcoa has cut production in Brazil. While investors are likely cheering Alcoa's recent momentum, whether it can continue remains to be seen.

A potential catalyst for 2014, after a disappointing 2013
From an operating standpoint, Alcoa is still stuck in the mud. Last year, the company booked a $2.3 billion loss, due primarily to a $1.7 billion goodwill impairment charge. Of particular concern was that its core metrics deteriorated, casting doubt on whether the company is out of the woods or not. Revenue fell by $700 million in 2013, due primarily to a 4% decline in realized aluminum prices.

At the same time, it seems there's a fair amount of optimism baked into Alcoa's rise. This buoyancy stems from a few promising developments that have emerged recently. For example, Ford (NYSE:F) announced its new line of pickup trucks will feature an aluminum alloy that results in lighter vehicles and greater fuel efficiency. Its 2015 F-150 line will employ what Ford labels a 'military-grade aluminum alloy' in the body and bed. The 2015 model will weigh 700 pounds less than its predecessor, and the new aluminum alloy is more easily recycled. This means greater fuel efficiency and minimized waste.


Alcoa will very likely benefit from this, since its automotive division is a major part of its business. Alcoa projects aluminum use in automotive parts will double by 2025. Based on the facts that Alcoa is the largest aluminum producer in the world and the F-150 is the most popular vehicle in the United States, a budding partnership should have significant results for Alcoa.

Not an entirely rosy outlook
Still, Alcoa continues to grapple with underlying supply constraints. The company is curtailing capacity at two smelters in Brazil in response to poor pricing and increased costs. These forces have combined to make ongoing operations at the smelters uncompetitive.

Production capacity at these smelters is pegged at 147,000 metric tons. The decision is part of a broader review process in which Alcoa is rethinking production at facilities with the highest operating costs. Going forward, Alcoa revealed it could halt as much as 800,000 tons, or 21%, of its total capacity.

This is a significant curtailment of production that will weigh on the company's near-term results. Alcoa warned it will likely incur a $0.05 per-share charge in the first quarter. Idling its Brazil smelters is a continuation of a disturbing trend for Alcoa. It's also going to curtail production at a smelter in Australia which will result in a 190,000-ton decline in production. Last year, it shut down facilities in the United States, Canada, and Italy again involving 190,000 tons of capacity. These are the primary factors that have weighed on Alcoa's recent operating results.

Alcoa offers a mixed picture
Alcoa has rallied strongly in just a couple of months, which may give investors a sense of optimism. Indeed, the steady global economic recovery and recent developments out of Ford could pave the way for a more profitable future.

However, Alcoa isn't out of the woods just yet. It continues to suffer from production shut-downs which were a major reason behind the massive loss incurred last year. Hopefully, the newest rounds of production curtailments are a short-term issue. Otherwise, the benefits of a potential partnership with Ford may be over-shadowed.

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Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.