Key challenges for Alcoa
Previously in this series, we discussed Alcoa’s (AA) major opportunities in the year to come. We’ll now turn to the major challenges the company must contend with. We’ll begin by analyzing the macroeconomic or global challenges that the aluminum industry in general faces, including the slowdown in major countries.
Slowdown in Russia
Russia is an important aluminum export player. In fact, it’s the world’s largest aluminum exporter. Russia has an abundance of energy resources, and aluminum production is an energy-intensive process. Electricity can account for up to one-third the cost of aluminum production. That’s why aluminum producers tend to produce electricity for captive use.
Alcoa (AA) is 20% self-sufficient as far as its electricity needs are concerned. Rio Tinto (RIO) produces ~36% of its own electricity requirements. Century Aluminum (CENX) sources most of its electricity from third parties. Currently, it’s part of the SPDR S&P Metals and Mining ETF (XME).
The Russian economy contracted in November. This has raised fears that Russia could be headed for a full-blown recession next year. A slowdown in the Russian market might lead to greater aluminum exports from the country. And this is a potential risk for the global aluminum industry.
The Japanese economy is showing no signs of revival despite the intent of major policy initiatives. Japan is among the biggest aluminum importers. A slowdown in Japan might lead to lower global aluminum demand. This is another potential risk for investors in 2015.
China is another important economy that investors in aluminum plays should closely watch. China is the world’s largest consumer of aluminum. Aluminum Corporation of China (ACH) is a major aluminum producer in China, as we’ll discover in the next part of this series.