In 1886, Charles Hall invented the modern process for manufacturing aluminum in the shed behind his Ohio home. Two years later, he co-founded the Aluminum Company of America, which was later renamed to its acronym: Alcoa (AA). While a lot has changed over the last 130 years or so, a critical part of aluminum smelting remains the same: the requirement to burn a carbon-based material in the final step.

Because the step is a process-related chemical reaction, carbon dioxide is emitted even when the overall process is powered by renewable energy. It's a big deal. That single chemical reaction accounts for 20% of all emissions from global aluminum production, which accounts for 1% of the planet's total carbon emissions -- equivalent to the greenhouse gas output of the United Kingdom. Aluminum's importance as a material, used in everything from your iPhone to your fuel-efficient car, largely forces manufacturers to accept the environmental burden. But that will soon change. 

Alcoa created a new process for manufacturing aluminum that produces oxygen, rather than carbon dioxide, in the final reaction step to yield the world's first truly carbon-free aluminum production process. While the environmental breakthrough has major implications for the industry and planet at large, it could also transform the business as investors know it today.

A hand holding up a light bulb with a tree in the background.

Image source: Getty Images.

Carbon-free aluminum, explained

It shouldn't be understated: Removing direct carbon dioxide emissions from the smelting process has been the holy grail of the aluminum industry for decades. It's fitting that Alcoa was the company to discover the breakthrough, but the technology wouldn't have left the lab without some help.

During its global search for lower-impact materials, Apple stumbled onto the Alcoa lab in Pittsburgh toiling away at aluminum processing improvement. The technology giant is one of the world's largest consumers of aluminum and has worked hard in recent years to source all of its energy from renewable sources, in addition to encouraging its materials suppliers to implement greener, cleaner, and more ethical production processes.

In fact, Apple facilitated the partnership between Alcoa and Rio Tinto (RIO 0.60%). The miner came on board to form a joint venture called Elysis (from "electrolysis," the process that was altered to remove carbon dioxide emissions) that will license the technology package to global aluminum smelters by 2024.

To do that, a little more research and development is required. So, the nation of Canada and province of Quebec are contributing a combined $92.5 million for additional research, while Apple is throwing in $11 million to go along with $42 million from the JV partners. That's a small price to pay for the possibility of forever altering the aluminum company's business.

Aluminum ingots stacked.

Image source: Getty Images.

Alcoa, technology provider?

After splitting away from Arconic to focus on the aluminum supply chain, which includes bauxite and alumina, Alcoa has made tremendous progress transforming itself. That transformation has largely focused on improving its financial strength by lowering debt, reducing its pension obligation shortfalls, and maintaining the cash kept on the balance sheet above $1 billion.

So far, so good. The aluminum leader ended 2017 with $1.36 billion in cash on hand and generated $2.68 billion in total adjusted EBITDA for the year -- easily the highest total in years. It's expected to get even better this year, as the company's full-year 2018 guidance calls for adjusted EBITDA of $3.5 billion to $3.7 billion. 

The transformation comes at a pivotal time in Alcoa's history. The company has recently turned its reliance on hydroelectric power, which provides 70% of its electricity consumption, into a competitive advantage by creating the premium Sustana brand of "green aluminum." Although it produces about 2.5 metric tons of carbon dioxide per metric ton of aluminum, it's the lowest-carbon aluminum on the market. Rio Tinto's RenewAl brand emits 4 tons of carbon dioxide per ton of metal, while coal-fired smelters in China cough up 18 tons of carbon dioxide per ton.

A hydroelectric dam spillway.

Image source: Getty Images.

That said, green aluminum is relatively new, so it's difficult to determine the significance of the trend in the near term. But the emergence of Elysis creates the possibility for truly carbon-free aluminum for all smelters using renewable energy in the long term. The new smelting process's potential to act as a force multiplier for the fledgling green aluminum market could encourage major producers to invest in cleaner production ahead of 2024. Customers may even demand it, and no producer will want to be left behind.

That could help the technology packages sold by Elysis to sell like hotcakes in several years -- and reposition the North American aluminum industry as the center of the global industry in the process. In fact, that seems to be a crucial part of the long-term strategy for Alcoa and even Canadian Prime Minister Justin Trudeau. As stated in the press release: "When fully developed and implemented, it will eliminate direct greenhouse gas emissions from the smelting process and strengthen the closely integrated Canada-United States aluminum and manufacturing industry. The new joint venture company will also sell proprietary anode and cathode materials, which will last more than 30 times longer than traditional components."

The key here for investors is that the technology packages will include process know-how and materials required to enable the carbon-free smelting process. Those will be provided by Elysis (and sourced from the United States), opening the door for substantial technology licensing revenue for Alcoa through its equity investment. That could provide a steady foundation of profits in an industry known for volatility and high costs. And that's on top of the company's ability to implement the technology at its own smelters worldwide to provide the world's first global supply of carbon-free aluminum products.

Aluminum rolls sitting in a warehouse.

Image source: Getty Images.

Alcoa is going green -- and taking everyone with it

While 2024 is several years away, the announcement of Alcoa's carbon-free aluminum smelting process couldn't have come at a better time. The company is the strongest it has been in years, thanks to severe imbalances in the global market for alumina and aluminum. That provides it financial flexibility to ramp up investments in Elysis, if necessary.

Meanwhile, most major producers just began offering green aluminum brands created using renewable energy, but can't market them as "carbon-free" because of the emissions involved in the final smelting step. That could change in 2024 should they license the technology package from Elysis -- and customers such as major automakers or Apple may even demand it.

If that results in a race to increase renewable energy in the aluminum industry in the next few years, then investors should take it as a proxy for the eventual success of the new process technology. It could be truly transformational for Alcoa, and forever change the face of the company.