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Alcoa (AA) is upbeat about the future of the aluminum industry. At the company’s recent shareholder meeting, Alcoa Chairman and CEO Klaus Kleinfeld detailed his views of an “aluminizing” world. [1] He predicts that the global consumption and supply of aluminum could double from its 2010 figures by the year 2020. This growth is expected to be fueled by an increasing demand for “more efficient infrastructure and transportation solutions”. Alcoa is the world leader in the production and management of primary aluminum, fabricated aluminum and alumina, and competes with other international metals and mining giants like Rusal, Rio Tinto (RIO), BHP Billiton (BHP) and Chalco (ACH).

The Global Outlook for Aluminum

Alcoa predicts that the most significant growth in demand for aluminum comes from the automotive and aerospace markets, with the need for more fuel-efficiency spurring increased competitiveness of aluminum to the metals commonly used in the construction of cars and airplanes.

The company forecasts a compound average growth rate of 6.5% in aluminum demand. This represents a growth in annual demand for bauxite from 214 million tonnes to 400 million tonnes. Alumina is expected to grow from 82 million tonnes to 156 million tonnes in a year, and aluminum growth would be from 39 million tonnes to 73 million tonnes per year.

What this Means for Alcoa

As the industry leader, Alcoa is poised to extract maximum value out of the increasing demand for aluminum.

(Chart created by using Trefis' app)

Let us assume that the 6.5% growth in industry demand leads to a conservative 4% per annum growth in the quantity of aluminum shipped out by Alcoa’s primary metals division. Then the division’s shipments would exceed 5 million tonnes over the next 5 years from its current value of just less than 4 million tonnes.

This scenario represents a 7% upside to our $18.55 price estimate.

Our price estimate for Alcoa, at $18.55, implies a premium to market price.

Notes:

  1. Global Trends Driving Increased Aluminum Demand, Alcoa Press Releases, May 13 2011

Disclosure: No position

Source: Alcoa Predicts Boost in Aluminum Demand