Alcoa Inc (NYSE:AA) is the one with true mettle, Kaiser Aluminum Corp (NASDAQ:KALU)
It is said that the tough will only get tougher when the road is rough and Alcoa Inc (NYSE:AA), the leading aluminum producer in the world, is flexing its muscles every single day. The massive aluminum glut and dropping aluminum prices are the two demons that the company has been waging a war with for some time now and its performance has taken a hit. So, is it the end of the road for the aluminum maker and should smart investors abandon a seemingly sinking ship? Well, not really! The company’s Q1 results were a ray of sunshine and analysts did sit up and take notice. But that’s not the end of the story. Alcoa is a fighter and fight it will.
The market glut
The root of AA’s woes lies in the current overcapacity in aluminum markets. Barclays has said that 2013 will be the 9th consecutive year in which supply will exceed the demand. This year, analysts have projected a surplus capacity of over 1M tons.
This excess will be from China as its production is set to increase by 10% or 2.2M tons in the current year. Producers in China are also cowering under the global oversupply, but government incentives and subsidies buffer them from the blows.
It doubled its capacity from 9.3M tons in 2006-19.7m tons in 2012.
It’s not just AA that has been affected. Kaiser Aluminum Corp (NASDAQ:KALU) and Century Aluminum are other producers who are trying the find a footing on shaky aluminum ground right now. Many years ago, KALU had been dogged by numerous lawsuits. Apart from this, it was also fighting a labor dispute and careening legal costs contributed to its downfall and eventually the company filed for bankruptcy in 2002.
In the interim period, it shed its non-strategic alumina nd bauxite operations and many of its primary aluminum holdings. Post its emergence from bankruptcy, KALU is more focused with developing various high-quality, fabricated-aluminum products. Major manufacturers and suppliers in the aerospace, automotive general engineering as well as custom industrial markets are its customers. This makes it an ideal pure play. The drop in aluminum prices has not affected it too much as its focus area are fabricated products.