A Brighter Outlook for this Aluminum Giant

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The aluminum giant Alcoa (NYSE: AA) seems to have had an official kick start with its quarterly results announced last week.  The in-line profits, and once again the better-than-expected revenue, seemed to have an impact on the investors. Overall, the company’s outlook for the fiscal year were raised with the global aluminum demand growth up to 7%. The company, which is a Dow Jones Industrial Average (DJINDICES: ^DJI) component, is seeing robust growth in China, with its end markets coming back in form.  The 2013 outlook of the company has been quite surprising and has attracted investors all around.

Raising the Graph

The continuous weakness in the aluminum market had raised fears about the company’s key statistics, but the bullish outlook on China brings a positive change in not only the aluminum industry, but also impacts the global economy as a whole. The company’s December quarter results showed a slender improvement in sales on a sequential basis, but the profit front saw good news, with its EBITDA margin doubling to 10% over the preceding quarter.  Alcoa performed well with its $1.3 billion 2012 productivity gains, which are above the initial $850 million target. The net productivity benefit on its income statement was $136 million, or $0.09 EPS.

2012 Flashback

Alcoa reported a loss in the third quarter of 2012 because of steadily declining demand in the aluminum industry. A loss of $143 million, or 13 cents per share, was posted in comparison to a profit of $172 million, or 15 cents per share, in the year-ago quarter. In addition, the company recorded a $40 million charge associated with a legal settlement in the quarter.

Against the 10% growth in 2011 and 13% in 2010, the demand for aluminum in 2012 has grown only by 6%. Owing to its slowdown in China, the rise in demand of aluminum was less than the expected 7%.

Challenges

A major challenge for the top North American aluminum producer is its market value in China, which is somewhere hampered by the self-sufficiency of China.  Moreover, aluminum has a downside risk with worsening structural oversupply conditions due to lower demand. However, Alcoa has acted wisely in reducing some of its inventories in order to overcome this deficit.

Alcoa claims to be the inventor of the aluminum industry and boasts a status as the world’s leading integrated aluminum company. Representing 14.7% of 2011 global production in this highly consolidated industry, Alcoa is in a prime position to take advantage of growth that is likely to lead the total industry revenue to about $160 billion by 2017.

However, Alcoa faces stiff competition with Aluminum Corporation of China Limited (NYSE: ACH), which has posted a return of 12.09% in the past year, above Alcoa’s 7.29%.  The Chinese rival seems to have left behind Alcoa with a very poor scope in China for the latter.

Recently, Alcoa was outbid by the mining giant Rio Tinto (NYSE: RIO) which paid more than $38.1 billion against Alcoa’s $28 billion offer to buy it’s Canadian aluminum rival Alcan. The amount quoted by Rio Tinto exceeded that of Alcoa and caused the latter to take back it’s offer. Accordingly, an entirely new company under the name Rio Tinto Alcan, headed by the Alcan Chief Officer, would now be based in Montreal, Canada.

Furthermore, Rio Tinto has attractive offers for its investors. It offers a 65.5% premium on Alcan’s closing share price before Alcoa’s May 4 takeover bid, while offering a 33% premium on Alcoa’s offer.           

Future Outlook

China was one of the main reasons for the decline in growth in 2012, as it accounts for 46.5% of global aluminum demand. Its economic growth in 2013 shall determine the fate of Alcoa’s estimates. Alcoa expects demand to rise 4.5% globally in 2013, with China alone seeing an even more impressive rise of 8%-10%.

Although after a tough past, Alcoa has succeeded in beating estimates and is likely to perform well in future. If only the demand for aluminum goes up, Alcoa can be a good deal for investors.


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