Key Drivers Of Alcoa’s Midstream Operations In 2015



Alcoa’s midstream operations

Alcoa’s midstream operations produce global rolled products, or GRP. This is Alcoa’s (AA) second-biggest segment. Midstream operations convert primary aluminum into metal sheets, which are used in the packaging, automotive, and aerospace industries.

Ford’s F-150 mini truck is expected to hit markets early 2015. This truck’s body is all aluminum. Aluminum companies expect more automobile manufacturers to come up with all-aluminum vehicles. The above chart shows the increasing aluminum content use in vehicles.

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2015 outlook

Alcoa is working on expanding capacity at its Tennessee facility with an investment of $275 million. The company expects this facility, which will supply auto body sheets, to be operational by mid-2015. According to Alcoa management, the company already has contracts in place to sell the products from this expansion.

Alcoa is targeting revenue growth of ~5.5% in its GRP segment in 2015. It expects to maintain its EBITDA (earnings before interest, taxes, depreciation, and amortization) per ton at historical highs of $344 per metric ton.

More value added

Alcoa has developed an aluminum foil that is about a third of the thickness of human hair. It’s called aseptic foil, and it’s used by the milk packaging industry in Brazil. This is another example of the of value-added products that Alcoa is developing, and with which it’s increasing its profit margins.

Century Aluminum (CENX) has also indicated that all its future investments will go toward growing its value-added business. In contrast, this aspect of the aluminum value chain hasn’t been adopted by primary producers Rio Tinto (RIO) and BHP Billiton (BHP).

The SPDR S&P Metals and Mining ETF (XME) seeks to build a diversified portfolio of these companies.

In the next part of this series, we’ll learn about Alcoa’s downstream business.


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