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Is the Dow (.DJI) Making a Mistake Giving Alcoa Inc (AA) the Boot?

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Photo credit: Motley Fool

It’s a bittersweet week for those of us with ties to the City of Pittsburgh. The iconic Dow Jones Industrial Average announced a sweeping change to the markup of its 30 stock index. Among the three stocks it’s cutting loose is one of Pittsburgh’s own: Alcoa Inc (NYSE:AA). For a city that has been through a lot over the decades, it was just one more reminder that the economy of the past isn’t what will drive the future. On a more positive note, at least the Pirates are finally thriving, having secured the first winning season since 1992.

For Alcoa Inc (NYSE:AA), the move by the Dow marked the end of an era. The aluminum giant had been a member of the index since 1959. However, it’s a move that isn’t surprising given how much the company has suffered since the financial crisis. In one sense, the move is merely confirming what we already know: Alcoa isn’t as reflective of the overall economy as it once was. While the economy has steadily recovered, Alcoa Inc (NYSE:AA) simply has never regained its footing.

That being said, this isn’t a company whose best days are completely in the rear view mirror. In fact, Alcoa just might be on the cusp of a new phase in aluminum demand growth. Because of the trend toward fuel efficiency brought on by an aggressive change in CAFÉ standards, Alcoa Inc (NYSE:AA) really could be in the driver’s seat to benefit from increased future demand.

A recent study shows that an all-aluminum vehicle can reduce its total body weight by 40%, which provides an 18% boost in fuel economy over a comparable steel based structure. The auto industry is really starting to take notice. For example, Tesla Motors Inc (NASDAQ:TSLA)’s red-hot Model S boasts of an all-aluminum body. Not only is the all-electric car producing stunning performance, but it also received one of the highest safety ratings ever from the National Highway Traffic Safety Administration. That’s because, pound-for-pound aluminum can absorb twice as much crash energy as steel.

Aluminum is also starting to really catch the eye of Ford Motor Company (NYSE:F), which is considering using liberal amounts of it to build the next generation models of its F-150 and Mustang. Not only would replacing steel with aluminum boost fuel economy, but it would also increase performance and safety.

Because of this, Alcoa Inc (NYSE:AA) sees its automotive aluminum sheet sales tripling by 2015. Most of that move will be because mass market producers like Ford are seeing the benefit of switching to aluminum for the body of the vehicles it makes. Overall, Alcoa sees the use of aluminum auto sheets for vehicle bodies quadrupling to 420,000 tons by 2015. That’s in addition to a 15% increase in aluminum used elsewhere in the vehicle to a total of 2.66 million tons by 2015. While auto currently makes up just a tiny slice of Aloca’s sales, this growth is still encouraging.

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