Case Study: Alcoa

1007 Words5 Pages
• China accounts for over 50% of global aluminum consumption and 56% of global aluminum production, and this is bad news for AA.
• AA is highly-optimistic about aluminum demand, but it is escaping the reality of oversupply in the industry that’ set to continue due to weak demand from China.
China’s aluminum production growth is outpacing the industry as it looks to dump cheap aluminum into the global market, and this will be another headwind for aluminum pricing and AA.
• AA has decided to split its business into two, but this does not change the fact that the company will continue facing pressure from slowing auto demand in China.
Alcoa: Prepare for More Downside
Alcoa (AA) is not going to make a comeback in the near future. For the quarter
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Let’s see why.
The split of Alcoa might not work
Alcoa has decided to split into two separate publicly-traded companies: The upstream company and The Value-Add company. The former will include Alcoa's Global Primary Products unit, while the value-add company will include Alcoa's Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions segments.
By doing so, management has actually separated the two businesses on the basis of their different behavior in a particular aluminum price environment. The upstream business is highly correlated to aluminum prices, while the value-add business is not. Therefore, this move should be seen as a wise one because. Moreover, when the pricing environment improves, the upstream company will show strong growth, which in turn will strengthen the whole portfolio of Alcoa.
But, a turnaround in aluminum pricing is not to be expected any time soon as China will remain under pressure. Now, apart from being the biggest consumer of aluminum, China is also the biggest producer of the commodity. The worrying part is that despite the oversupply in the industry and a slowdown in its own economy, China has continued to increase production and created more pressure on aluminum
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This segment is counting on growth in areas such as automotive and aerospace for growth, but it doesn’t have a clean runway for growth over here either.
China, which is the world’s biggest auto market, is facing a slump due to an economic slowdown. The impact of this slowdown is clearly being felt by the auto industry, with sales dropping for three months in a row from June to August. In fact, it is estimated that the Chinese auto market might witness a contraction this year, which is why it is not surprising to see that aluminum usage in the auto industry will decline.
SCI International recently stated that aluminum consumption by the auto industry in China will drop to 210,000-220,000 tons as compared to a prior-forecast of 250,000 tons, indicating a drop of 14%. This will increase the oversupply situation in the industry and lead to weaker prices. On the other hand, in Europe, the rate of growth in car sales is decelerating, which is another reason to worry for
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