uploads/2015/01/primary-last1.png

Alcoa Looks To Improve Upstream Performance

By

Updated

Upstream operations

The upstream operations segment is the biggest revenue driver at Alcoa (AA). Upstream revenues make up almost 40% of Alcoa’s revenues. Alcoa expects operational improvements and portfolio strategy to drive its upstream operations in 2015.

Article continues below advertisement

Operational improvements

Alcoa realized productivity-related gains of $201 million in 2013–2014. It’s expected to realize further such benefits in 2015. Lower energy costs should also benefit Alcoa’s primary business because aluminum production is so energy intensive. Alcoa has already executed new energy contracts for one of its smelters.

Lower energy prices will also reduce the electricity production costs at Alcoa’s captive power plants, which should further boost the profitability of Alcoa’s primary business in 2015. To learn more, read Why investors need to understand the cost curve.

Primary producers including Rio Tinto (RIO) and BHP Billiton (BHP) should also benefit from falling energy prices.

Portfolio strategy

The chart above shows Alcoa’s strategy for its primary business. It’s working to reduce the unit production costs at its plants. If this isn’t possible, then Alcoa will idle these plants.

Very recently, the company sold its stake in the Mt. Holly smelter. The stake was bought by Century Aluminum (CENX), Alcoa’s joint-venture partner in the plant. Currently, Century is a part of the SPDR S&P Metals and Mining ETF (XME).

Alcoa is in the process of exiting its high-cost plants in Jamaica and Suriname, and should be done in 2015.

Another key driver for Alcoa in 2015 could be its new facility in Saudi Arabia. We’ll cover this in our next part.

Advertisement

More From Market Realist