After the split, the new Alcoa (AA) will house the business units that are currently under the Primary Metals and Alumina segment. Alcoa will have some 17,000 employees throughout 64 locations and will be the largest global bauxite and alumina producer with a strong first-quartile cost position in bauxite and alumina. The company will count Century Aluminum (CENX), Norsk Hydro (NHYDY), Aluminum Corporation of China (ACH), and Rusal among its competitors.
Alcoa is expected to be the fourth-largest aluminum producer with a smelting capacity of 3.4 million tons. Alcoa has been striving to create a globally competitive commodity business. One of the ways to become competitive in the commodity business is to reduce costs. This often means making tough decisions such as closing down high-cost capacities. While commodity producers don’t have much control over commodity prices (GSG), they can still control their cost positioning in the industry to some extent. Alcoa has been proactive in curtailing its high-cost capacity to survive in the current pricing environment. Its smelting capacity has come down by more than one-third since 2007.
Power generation and casthouses
Alcoa will have a power production capacity of ~1,550 MW (megawatts). Out of this, the company currently uses ~30% for its captive needs while the company sells the remainder to the power grid.
Alcoa will also have a portfolio of 17 casthouses, which will provide value-add products to customers. Value-add products formed ~70% of Alcoa’s smelter shipments in 2015, up from 57% in 2010. The value-add products sell at a premium to other standard products like ingots.
However, the Primary Metals segment, which produces aluminum, will be the key driver of Alcoa’s post-split performance as we’ll explore in the next part of the series.