Why investors should understand Alcoa’s business model

Now, we’ll analyze the aluminum value chain. This will help you understanding the transformation that Alcoa (AA) is implementing in its operations. The aluminum industry has a value chain that consists of upstream and downstream companies. Upstream companies are engaged in the mining and refining operations.

This involves two steps. The first step is the bauxite extraction. The second step is refining the bauxite to alumina. Mining companies—like BHP Billiton (BHP) and RIO Tinto (RIO)—are upstream aluminum companies.

Alumina is used to produce primary aluminum. Companies like Century Aluminum (CENX) are engaged in primary aluminum production.

The next part of the aluminum value chain is fabrication. Aluminum is given a custom shape and size. Value-added products are produced. Constellium N.V. (CSTM) and Kaiser Aluminum (KALU) are mainly engaged in aluminum fabrication.

The previous chart shows Alcoa’s position in aluminum value chain. As you can see, it’s an integrated player. This means its operations extend from bauxite refining to aluminum fabrication. Alcoa has its upstream operations under global primary products. Upstream operations basically cover all the aspects of aluminum production. Aluminum production includes mining, refining, smelting, and energy production.

Primary aluminum is then turned into aluminum sheets and plates. This occurs in the midstream operations. Alcoa’s engineered products division is engaged in fabrication operations.

Alcoa is working on a strategy to transform its operations. What’s this transformation? We’ll discuss this in the next part of the series.

It’s important to note that Alcoa is currently a top holding of the SPDR S&P Metals and Mining ETF (XME).