Alcoa to Cut Alumina Capacity: Impact on Stock

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Alcoa ( AA) has announced that it plans to curtail its alumina refining capacity, an expected move following a slump in alumina prices and in line with the company's plans to cut smelter capacity.

Alumina prices have also declined to a level at which the company was finding it difficult to justify continuing production at higher cost plants. This move will reduce the company's alumina refining capacity by approximately 390,000 tons in the Atlantic region. The Atlantic region encompasses about half of the company's total annual alumina refining capacity of 18 million tons.

Our price estimate for Alcoa stands at $12, implying a premium of close to 20% to the current market price.

The company expects these steps to curb the oversupply of alumina while enhancing the efficiency of its refining system. Should this not succeed, the company may have to opt for further capacity cuts which could significantly impact our price estimate given that alumina constitutes about 27% of our valuation.

Another fact to note is that Alcoa's January prediction that China's aluminum industry would cut 1.1 million tons of capacity hasn't been realized. Should that occur it would likely provide a healthy boost to aluminum prices by eliminating excess supply.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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