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Alcoa Closes Brazil Smelter: How Will It Affect Earnings?

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Closure of Brazil smelter

As we saw in the previous part, Alcoa (AA) has announced the permanent closure of its Poços de Caldas smelter in Brazil (EWZ). The company will bear restructuring charges between $0.08 and $0.09 in its 2Q15 earnings. Almost 60% of these charges will be non-cash in nature.

Restructuring charges related to Alcoa’s transformation

Alcoa has reported restructuring charges in the last several quarters. These restructuring charges are due to several portfolio actions Alcoa has initiated. They’ll help Alcoa become a more agile and profitable company. The results of these portfolio actions can be seen in Alcoa’s operations, where it has improved its cost positioning considerably.

The above graph shows the cost improvements Alcoa has achieved over the last few years. Between 2010 and 2014, it improved its global positioning in alumina from the 30th percentile to the 25th percentile. In aluminum, its positioning on the global cost curve has improved from the 51st to the 43rd percentile over this period.

These measures will pay off in the long term

The closure of the high-cost Brazil smelter will help Alcoa further improve its positioning on the global cost curve. Its new plant in Saudi Arabia is reported to be the lowest cost facility globally.

Primary aluminum producers don’t have much control over pricing. Pricing is determined by the prevailing LME (London Metals Exchange) aluminum prices and regional premiums.

What producers can do is control their unit production costs. This is what Alcoa is trying to do by exiting the high-cost smelting capacity.

Alcoa has also made several acquisitions in the value added business, including the yet-to-be-completed acquisition of RTI Metals (RTI). RTI and Allegheny Technologies (ATI) each forms ~4% of the SPDR S&P Metals and Mining ETF (XME).

What else is Alcoa doing in its downstream business? We’ll see in the next part of this series.

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