As aluminum continues to rebound from its lowest prices in three years, Alcoa Aluminum (NYSE:AA) is betting on an aluminum deficit to help its stock price continue the nearly 50-percent increase it's seen so far this year.
Aluminum prices dropped in 2011, starting a free fall that only started to reverse this year. Prices for the metal have risen about 10 percent in 2014, and analysts predict a global aluminum deficit will correct years of market saturation. Aluminum's good fortune has come as the automobile market has turned its attention to utilizing the light metal for producing cars.
In terms of how good the metal's prospects look, FastMarkets estimates that the price of aluminum will hit $1,900 a tonne by the end of the year, up from roughly $1,860 in 2013.
Cutting production, boosting revenue
Alcoa, which accounts for 7 percent of the world's aluminum output, has placed an emphasis on cutting production to help offset the aluminum surplus.
The American company posted a first-quarter loss of $178 million as it cut production in Brazil and closed plants in Australia and New York. At the time, CEO Klaus Kleinfeld said the company was seeking 800,000 tonnes of smelting cuts to various projects.
Amidst those cuts there was a glimmer of good news that has helped boost prices since: Alcoa announced a projected worldwide deficit of 730,000 metric tons (MT), up from 106,000 MT in January. Barclays has predicted an even larger deficit of 1.1 million MT, the largest market deficit since the early 1980s.
Alcoa's results since the first quarter have been full of nothing but good news.
The company posted a $138-million profit in the second quarter — a sizable improvement from its $119-million loss the previous year. It also closed its smelter in Italy in August, further cutting back production and reducing costs. A real change has come as the company has looked to branch out into different industries looking to utilize aluminum.
In addition to cutting production, Alcoa has made big moves into the aerospace market, looking to take advantage of what it predicts will become a booming industry for aluminum companies. It came to an agreement worth $1.1 billion to supply jet engine components to Pratt & Whitney, acquired jet engine components maker Firth Rixson for $2.85 billion and recently signed a $1-billion contract with Boeing (NYSE:BA). The contract with Boeing will make Alcoa the sole supplier for wing skins that will be used on every Boeing platform. Kleinfeld estimates that his company's aerospace business will grow as much as 9 percent and that sales of auto sheet could rise to $1.3 billion by 2018, up from $330 million in 2014.
It's not just the sky that Alcoa is looking to make money out of. The company is developing an aluminum oil pipe to be used for US domestic oil production. An aluminum oil pipe would theoretically help companies save money on using heavier, more expensive rigs to deal with traditional heavy steel pipes. The company has produced aluminum oil pipes since 2011, but they have largely been used in international oil production.
The Financial Times predicts the company will outperform the market and sees its share price averaging $16.25. Third-quarter results for Alcoa are due to be released on October 8, and they could bring more good news for the company, which is certainly staying ahead in the changing aluminum market.
Securities Disclosure: I, Nick Wells, hold no direct investment interest in any company mentioned in this article.
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