ALCOA Inc. (AA)

[ogbull]

Alcoa Performing Strongly Despite Low Aluminum Prices
by Stuart Burns on JULY 14, 2015 -link-

CONDENSED

Looking purely at the aluminum price one might have expected Alcoa, Inc., to report a dire results in its latest second quarter but quite the contrary. While facing considerable “headwinds” according to Klaus Kleinfeld, the company’s chief executive, the firm has put out a decent set of results.

Alcoa’s strategy of closing high-cost smelters, migrating to lower cost primary production in the Middle East, and diversifying into other alloys and downstream higher value-add products has clearly paid dividends for the New York-based multinational.

Diversification Paying Off

The share price is down 33% for the year because the business is exposed to lower aluminum prices. Regardless, Alcoa still made a profit from primary smelting overall. Its upstream activities made $67 million after taxes, down from $97 million for the same period in 2014. A strong performance from the alumina division added a further $215 million of net income compared to $210 million for the specialized metals and components business. Alcoa is gradually exiting the smelter business, at least outside of it’s low-cost Middle East operations, but it’s not going to want to exit the stellar alumina business.

On the other hand, revenues —boosted by acquisitions and value-add investments — were slightly stronger than expected at $5.9 billion, up 1%, compared with an average forecast of $5.8 billion.

Looking forward, the firm sees good growth in the US market, with Europe gradually improving. Slower growth in China and South America is still expected. Some markets, such as global heavy truck demand, are seen by the firm as likely to remain depressed but aerospace and construction are expected to continue to do well.

Although Alcoa operates in a highly dynamic cost environment, it continues to perform well despite an appalling primary metal price. Its strategy of downstream investment and alloy diversification is ensuring it remains a viable long-term business in spite of the current state of the market.