Why Alcoa’s cost-cutting strategy is fix it, sell it, or close it

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Alcoa’s cost-cutting strategy

In the last part in this series, we saw how Alcoa (AA) plans to move down on the cost curve. In this part of the series, we’ll analyze the strategies that will help Alcoa achieve this goal.

As discussed previously, being a low-cost producer is a key driver for aluminum producers—like Rio Tinto (RIO) and BHP Billiton (BHP).

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Fix it, sell it, or close it

The previous chart shows Alcoa’s strategy in regards to its primary business. It’s working to reduce its plants’ unit production costs. If this isn’t possible, then Alcoa will idle the plants. Recently, it also sold its stake in the Mt. Holly smelter. Century Aluminum (CENX) bought the stake. CENX was Alcoa’s joint venture (or JV) partner in that plant. Currently, CENX is part of the SPDR S&P Metals and Mining ETF (XME).

Along with closing plants with high unit production costs, Alcoa is in the process of exiting its plants in Jamaica and Suriname. These plants represent Alcoa’s high-cost operations. In addition to exiting the high-cost operations, Alcoa increased production at plants with lower unit production costs. It’s also shifting to natural gas for some of its plants. The natural gas is used to generate electricity. This should help decrease the costs more.

JV in Saudi Arabia

Alcoa started operations at its JV in Saudi Arabia. This facility operates at the lowest costs globally. Recently, the smelting facility started its operations. Alcoa expects the rolling mill and refining operations to start operations this year. The plant will help bring down Alcoa’s unit production costs. These factors will help Alcoa move down the cost curve more.

In the next part in this series, we’ll learn about key developments in Alcoa’s Global-Rolled Products segment. This segment supplies automotive companies. Automotive companies drove aluminum demand in recent quarters.

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