Alcoa: Small Player vs. the Big Boys

Excerpt from Footnotes and Flashbacks: Week Ending January 20, 2023

Alcoa is not the same Dow Jones Industrial of old (dropped from Dow in 2013) since the 2016 spin-off from the legacy entity that is now Arconic. As we detail below, AA is now a very small operation among some globally diversified giants.  The smallest market cap on the list other than Alcoa is still a substantial multiple of AA. As an aluminum operator on the commodity end of the spectrum, AA is inherently volatile and subject to the swings in the global market.

The 4Q22 numbers for Alcoa were weak again with another quarterly loss after a loss in 3Q22 and now 4Q22. Free cash flow generation is solid despite the strained profitability metrics. The commodity swing factor for metals is usually China, and that is no different here. China also is a key factor in showing restraint in supply given its structural excess capacity. The longer term demand story for aluminum keeps many aluminum watchers optimistic, and Alcoa sited secular growth in transportation and packaging.  Demand from EV and hybrid vehicles remain favorable growth opportunities.

The company has generally been a mixed performer vs. major global metals and mining companies looking back the various time horizons above.  The challenge to aluminum producers in a high cost energy market includes the electricity intensity involved in the smelting process. As we routinely see in the CPI numbers, electricity costs are soaring. Europe has seen the most stressful challenge in unit cost pressures. Alcoa cited in general that some of the highest raw materials cost ever in 2H22.