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Alcoa Inc (AA), Alumina Limited (ADR) (AWC), Aluminum Corp. of China Limited (ADR) (ACH): Three Big Aluminum Companies to Analyze

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Alcoa Inc (NYSE:AA)The world market for basic materials is still experiencing demand contraction as a consequence of the international recession and the low growth in China. The aluminum industry is not exempted from this, and lower aluminum prices have hurt companies’ overall sales. In this context, the players in the aluminum field are being forced to trim costs in order to handle the pressure.

Let’s analyze how this strategy is working for the biggest companies.

Analyzing reductions but still investing

Alcoa Inc (NYSE:AA) has chosen two ways to face this industry dynamic. On one hand, it is executing aggressive cost-cutting actions. The company has put about 13% of its global capacity offline. We are talking about 568,000 tons of less product. In addition, Alcoa Inc (NYSE:AA) gave some hints about the possibility for further reductions to be put in place at its higher-cost plants over the next year. If it does, the company will achieve 23% of total cutoff in its global production capacity.

Despite the situation, Alcoa Inc (NYSE:AA)‘s balance sheet is rather healthy. In the first quarter of 2013, net income increased by 58.5% compared to the same quarter one year prior, rising from $94 million to $149 million. In the same period, earnings per share improved by 44.4%. The main drivers were higher aluminum demand for aerospace and auto markets, and cost-cutting actions.

The company has been investing in high-technology operation areas. In March 2011, Alcoa Inc (NYSE:AA) completed an acquisition of TransDigm Group’s aerospace-fastener business. Moreover, Alcoa Inc (NYSE:AA) has signed agreements for all Airbus commercial programs, to provide the company with aluminum sheet and plate, and aluminum lithium alloys for manufacturing aircraft. These are value-added initiatives that should help the company withstand market conditions.

Depending on the price of aluminia

Alumina Limited (ADR) (NYSE:AWC) is engaged in investing in bauxite mining, alumina refining and selected aluminum smelting operations through its 40% ownership of Alcoa Inc (NYSE:AA) World Alumina and Chemicals (AWAC). The company’s partner, Alcoa, owns the remaining 60% of AWAC.

This company is highly related to Alcoa, since most of its alumina production is destined to its partner’s aluminum smelters. Hence, Alumina Limited (ADR) (NYSE:AWC)’s performance is very exposed to Alcoa’s primary production decisions. For this reason, recent cuts in Alcoa’s plant production, along with lower realized prices for aluminum and aluminia, have been hitting Alumina Limited (ADR) (NYSE:AWC)’s balance sheet. Alumina Limited (ADR) (NYSE:AWC)’s total production declined approximately 150,000 tons in 2011 as a result of the announced curtailments affecting the refineries in the Atlantic region.

Alumina Limited (ADR) (NYSE:AWC) is still adjusting to the market conditions. In 2012, full-year revenue declined $852 million, a 13% decline compared to 2011. Profit performance was bad too, as the reported loss before income tax was $61.7 million by December 2012 against profit before income tax of $127.6 million a year ago. Additionally, Alumina’s net debt increased 40% compared to 2011, which represents a concern especially when the company keeps suffering from reduced cash from operations.

The Chinese issue

Just like Alcoa, Aluminum Corp. of China Limited (ADR) (NYSE:ACH) decided to temporarily reduce its production capacity by 380,000 tons. This company, also known as Chinalco, is a vertically integrated aluminum producer leader in China that operates in four segments: alumina, primary aluminum, aluminum fabrication, and trading.

Most of Aluminum Corp. of China Limited (ADR) (NYSE:ACH)’s production is concentrated in segments with low profits within the industry. In fact, primary aluminum represents about 60% of Chinalco’s revenue. This is not a good sign, since it shows how highly exposed the company is to the metal’s volatility.

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