Why Alcoa is improving its competitive position

As discussed previously, one of Alcoa’s (AA) focus areas is to create a globally competitive commodity business. This has been the objective for other aluminum giants—like Rio Tinto (RIO) and BHP Billiton (BHP). One of the ways to become competitive in the commodity business is to reduce costs. This usually means making tough decisions—like closing high-cost capacities.

In this part of the series, we’ll discuss the latest developments.

Alcoa idled several smelting plants since 2007. Its aluminum smelting capacity has come down by 28% over the period. Most of these smelters had high unit production costs. Higher costs can be due to several factors—like higher electricity costs, labor costs, or maintenance expenses.

Electricity is a very important part aluminum companies’ overall costs. Century Aluminum (CENX) idled one of its plants due to higher electricity costs.

In the third quarter, Alcoa closed two facilities:

• Portovesme plant – Alcoa closed this smelting plant in Italy. The plant had a production capacity of 150 tonnes. The restructuring costs associated with this plant negatively impacted Alcoa’s third quarter results by $167 million.
• Point Henry plant – Alcoa also closed this production facility in Australia. The plant had a production capacity of 190 tonnes.

At the start of the fourth quarter, Alcoa sold its stake in the smelter in Mt. Holly to CENX. This plant was a joint venture (or JV) between Alcoa and Century Aluminum. Currently, both of these companies are part of the SPDR S&P Metals and Mining ETF (XME).

How have these closures helped Alcoa? We’ll discuss this in the next part of the series.