Is There Value in Aluminum Midstream Operations?



Aluminum midstream operations

The aluminum produced by primary aluminum producers including Vale (VALE) isn’t directly usable. It has to be converted into custom shapes like sheets, rods, and tubes. These processes form part of aluminum midstream operations.

Several upstream producers like Alcoa (AA) and Norsk Hydro (NHYDY) also have midstream operations. These companies have rolling mills to produce sheet products for the automobile and packaging industry.

Then, there are players like Constellium (CSTM) that have aluminum rolling mills but they don’t produce primary aluminum.

Kaiser Aluminum (KALU) produces aluminum plates, sheets, and coils. These products are processed more by aluminum fabricators. Kaiser Aluminum is also into aluminum fabrication.

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Is there value in midstream operations?

Alcoa’s Global Rolled Products segment produces aluminum sheet products. It has generated a per ton EBITDA (earnings before interest, tax, depreciation, and amortization) of more than $300 for two consecutive quarters.

Currently, Alcoa forms 2.53% of the Materials Select Sector SPDR ETF (XLB). In the Rolled Products segment, there’s an overcapacity to produce packaging grade products. However, the auto body sheet market is capacity constrained, according to both Alcoa and Constellium. It isn’t surprising that both of these companies are investing more to enhance their auto sheet capacities.

Automotive demand

While the sheet demand from the packaging industry has been weak, the auto body sheet demand has been rising at a strong pace. The above chart shows the increase in vehicle aluminum intensity. Aluminum companies with exposure to auto body sheet including Alcoa and Constellium are expected to benefit from this trend.

In the next part, we’ll explore aluminum downstream operations.


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