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Outlook 2015: Alcoa Set To Benefit

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Key opportunities for Alcoa

In this part of the series, we’ll begin analyzing Alcoa’s (AA) key 2015 opportunities in detail.

Commodity plays such as Alcoa (AA), Century Aluminum (CENX), and Rio Tinto (RIO) are affected by macroeconomics as much as anything else. So it’s important to first understand the broader outlook for the aluminum industry.

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Outlook for the aluminum industry

The key drivers of the aluminum industry are demand and supply. Aluminum demand is driven by end consumers. The aerospace, automotive, and packaging industries are among the biggest aluminum consumers. We’ll cover the outlook for each, later in this series.

Aluminum supply is driven by primary aluminum suppliers. Alcoa, Rio Tinto, and BHP Billiton (BHP) are a few of the large aluminum producers. The SPDR S&P Metals and Mining ETF (XME) offers a diversified portfolio that includes these companies.

Aluminum demand is expected to be greater than production in the final analysis of 2014. This trend should continue into 2015, which should benefit Alcoa. Demand that exceeds aluminum production historically leads to higher premiums for the commodity.

Aluminum premiums impact the profitability of aluminum plays depending on where each sits in the aluminum value chain. The chart above shows how various companies figure within the aluminum value chain.

Aluminum premiums

Fabricators such as Constellium (CSTM) are negatively affected by rising aluminum premiums. In contrast, primary producers like Alcoa benefit when premiums go up. We’ll cover the outlook for aluminum prices and premiums later in this series.

Next, we’ll review the outlook for aluminum demand in 2015.

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