This Aluminum Company's Growth Estimates Justify Additional Upside

Aluminum prices have weakened considerably over the last year or so as a result of weak global demand and oversupply, negatively impacting Alcoa's Primary Aluminum and Alumina businesses.

In order to lessen its dependence on its commodity businesses, the company has been transforming its product portfolio towards its value-added business segments, which have more favorable demand prospects.

The company has just split its upstream and value-added businesses into two publicly traded companies.

Alcoa (NYSE:AA) is the leader in the production of aluminum products such as primary aluminum, fabricated aluminum, and alumina. The company is involved in every aspect of the industry including mining, refining, smelting, and recycling. Aluminum products and alumina represent more than three-fourths of Alcoa's revenues; accordingly the company is heavily impacted by aluminum prices. The company's non-aluminum products include fasteners for aerospace and industrial customers. Alcoa operates in more than 30 countries worldwide, in addition to investments in Australia, Brazil, China, Russia, Guinea, and Saudi Arabia. Bauxite, the primary ore used in aluminum production, along with alumina and power, make up most of the company's operating costs. Other raw materials used include petroleum coke, aluminum fluoride, fuel oil, steam, and coal.

In the last few years, Chinese bauxite imports have faced some challenges, namely:

Indonesia revoking mining and export licenses and imposing 20% export tax in May 2012; then Indonesia banning bauxite exports beginning Jan 2014; and Malaysia banning mining of bauxite beginning Jan 2016. The response of the Chinese bauxite consumers was similar each time: They brought in excess quantities ahead of the ban/tax and developed alternative sources. Chinese imports have now stabilized; they were down 3% in August, but up 4% YTD August. The YTD average import rate has been 4.2 mnt/month, supporting about 40% of domestic aluminum production; and Asian Metals reports that China currently had ~30 mnt of imported bauxite inventory as of mid September, or about 7 months of imports.