Alcoa (AA) is the world's leading producer of primary and fabricated aluminum, as well as the world's largest miner of bauxite and refiner of alumina. Due to pricing headwinds, 2013 was a challenging year for the company. Its share price moved 18% last year, from $8.99 per share to $10.63 per share.
Alcoa has struggled with high costs and falling demand due to the global recession. In response to these challenges, the company has improved its industry fundamentals and reshuffled its operating structure. With the improving global economy, Alcoa is well poised to capture the growing demand for aluminum. The main end users of aluminum are the transportation, packaging, and construction industries. They account for nearly 70% of the demand for aluminum products.
World demand for aluminum is expected to rise 5.9% annually through 2017 to 86.5 million metric tons. Alcoa is estimating growth of 7% in global aluminum demand in 2014. The future growth in the aluminum market will come from developing markets, especially China. China's share of global aluminum demand is estimated to increase from 43% in 2012 to 48% in 2017. The Chinese market has been both the largest producer and consumer of aluminum over the past few years. This demand is not expected to cease for the foreseeable future as the Chinese automotive, aviation, and building markets are still experiencing strong growth. Alcoa is in a good position to capture this growth, as its costs are about 25% lower than Chinese competitors. This is mainly due to the higher cost of inputs for competitors in China.
The auto industry is also driving the aluminum demand. Aluminum is 66% lighter than steel and is comparable in strength. This combination makes aluminum a popular substitute as manufacturers create lighter vehicles to boost fuel efficiency. Aluminum use per motor vehicle is expected to increase from a global average of 120 kilograms/vehicle in 2012 to 132 kilograms/vehicle in 2017.
The U.S. market for aluminum sheet is expected to increase from 200 million pounds in 2012 to 1 billion pounds in 2014, and then double from there by 2020 and reach 3.2 billion to 6.4 billion pounds by 2025. As US is the largest market for Alcoa, it is well positioned to benefit from the growing aluminum sheet market. The company expects that its revenue from auto sheet will increase from $160 million in 2012 to $580 million by 2015.
Profitability of Alcoa is heavily dependent on global aluminum prices. The price of aluminum is based on the London Metal Exchange price, which historically has moved in tandem with the input costs of aluminum such as raw materials and energy. According to EIU Economic and Commodity Forecast, Aluminum price will increase to $2153/tonne in 2015 and $2300/tonne in 2018. To improve bottom line, Alcoa has been restructuring its operations to lower operating costs and improve productivity. The company's target is to achieve a 10 percentage point reduction in the next two years.
The aluminum industry is a highly competitive and mature industry where supply exceeds demand. Aluminum companies differentiate themselves on the basis of price, quality, and product offerings. The largest competitors for Alcoa by market cap are Aluminum Corporation of China Limited (ACH) and Century Aluminum (CENX). Some of the key statistics for Alcoa and its competitors are given below.
Return on Assets
The chart represents that Alcoa's stats are almost as good or better than its competitors. Alcoa's gross margin, operating margin and return on assets percentage is much higher than its competitor. Higher return on assets means the company is more efficiently using its assets which is a sign of great management. Its total debt/equity ratio is higher than industry Avg., but this is not alarming as the company has a significant cash figure in its balance sheet.
Alcoa is in a position to begin a multi-year recovery. Rapidly growing aluminum demand will help the company to generate significant profit in the coming years. It also has a competitive advantage over their peers with the ability to greatly reduce the input costs, specifically energy. In my opinion, Alcoa is an attractive long-term investment.