NEW YORK (Real Money) -- The needle movers are all going in the right direction. That's the real takeaway from last night's Alcoa (AA - Get Report) conference call. The biggest drivers of worldwide growth -- the huge end markets in aerospace, trucks, autos and non-residential construction -- are all looking up. With just a couple of exceptions, notably in some European construction, every single end market is improving. It's the most bullish worldview Alcoa has given us since the Great Recession ended. No wonder the stock's been running so hard.
Now, there's always a lot of confusion about Alcoa and its importance as an indicator of anything, anything at all. The aluminum maker has had its share of ups and downs -- and it's been mostly downs, for sure. In large part this is because there is too much aluminum being produced in the world, but it's also because the company is so incredibly sensitive to worldwide growth.
That's because aluminum is used in pretty much everything, from cars and trucks to large office building construction to cans and bottles and turbines and, most importantly, aerospace.
Plus, there are two Alcoas. There's the non-value-added Alcoa that makes the raw materials that it and others can use to manufacture pretty much everything that needs strength and lightness, and then there's what Alcoa keeps itself and puts into its own value-added food chain.The first is hostage to both the world price on the top line and to the production costs on the bottom line. The second, the value-added, is dependent upon both the demand side and the share taken from other materials because of innovation. That's a huge number of moving parts, and it can explain why critics initially looked at Alcoa's flat revenue and decided, "Oh well, no expansion in the economy worldwide, another ho-hummer, it's all done with cost-cutting." Unfortunately, that couldn't be more misleading. In truth, the price of the metal keeps falling in part because of too much inventory and excess production, even as demand is on the increase. Meanwhile, Alcoa is producing less high-cost aluminum because of closed manufacturing capacity -- 420,000 tons in all, with another 200,000 coming. That makes for lower revenue but higher profit, which is pretty much the name of the game. What's the point of continuing to produce high-cost aluminum that loses you money just so you can show some revenue growth?