Alcoa Vision & Strategy

At Alcoa, our vision is to be the best company in the world—in the eyes of our customers, shareholders, communities, and people.

Supporting that vision are our core values and principles and our business strategy, which incorporates our approach to sustainability and corresponding strategic sustainability targets. Our strategy also hinges on the significant growth potential that we see in various markets.

Aluminum Industry Outlook

The global economic downturn, coupled with the global financial and credit market disruptions, had a historic negative impact on the aluminum industry. These events contributed to a decline in aluminum prices of more than 50% from their peak in 2008, broad-based demand erosion in all of our end markets, a sharp drop in global aluminum demand, increased global inventories, and higher costs of borrowing and/or diminished credit availability.

We saw conditions improve in 2010 not only in our end markets but also in global aluminum demand. Growth occurred in aerospace, automotive, and heavy truck and trailer, but it remained flat in beverage can packaging. The global commercial building and construction and industrial gas turbine markets continued to decline.

After a 6% global decline in aluminum demand in 2009, the market recovered and posted a 13% increase in 2010. This was driven mainly by China, other Asian countries, India, and Brazil.

We are projecting a 12% increase in the global consumption of primary aluminum in 2011. We anticipate market conditions for aluminum products in all global end markets to improve during the year, particularly in aerospace, automotive, and industrial gas turbine. China, India, Brazil, and Russia are all expected to have double-digit increases in aluminum demand.

In the long term, we believe the prospects for aluminum remain bright, as global megatrends—especially demographics, urbanization, and environmental stewardship—will continue to support and drive aluminum consumption in the future. Our projection is that global demand for aluminum will nearly double between 2010 and 2020.

These trends will benefit our preferred metal, as aluminum plays a significant role in the infrastructure of developing economies. This includes lighter weight for transportation equipment and special applications where aluminum does not have a substitute. Aluminum’s light weight, strength, and durability will continue to propel its use as one of the premier materials to help the world deal with climate change, particularly as both developing and developed markets look for ways to increase fuel efficiency across industries.

¹Consists of Middle East, Latin America except Brazil, and the rest of the world, including unallocated global increase. Alcoa analysis as of July 11, 2011.

Market Conditions in 2011

Alcoa analysis as of July 11, 2011.

Business Strategy 
In 2009, our management was faced with the challenge of preserving Alcoa’s future while navigating the company through a global economic downturn that coupled an unprecedented decline in London Metal Exchange (LME) pricing levels with a collapse in demand from aluminum product end markets.

Our management adopted a holistic response to this situation by initiating various actions, including the following:

• Curtailing additional refinery and smelter capacity;
• Reducing the quarterly common stock dividend;
• Issuing new equity and debt instruments;
• Optimizing our business and investment portfolio; and
• Instituting a two-year program to achieve targets related to procurement efficiencies, overhead rationalization, and working capital improvements.

All of these actions were aimed at reducing costs, improving cash levels, and preserving liquidity. Upon achieving the established performance targets in year one of this program, our management continued to steer the company through the downturn during 2010 by seeking to increase procurement efficiencies, overhead rationalization, and working capital improvements above and beyond levels that had been achieved in 2009. In addition, management set out to reduce debt and refinance long-term debt set to mature over the next three years.

Even with so much of our energy and attention focused on managing for cash throughout 2009 and 2010, we maintained our focus on growth. Key growth investments included the Juruti bauxite mine and São Luís refinery expansion in Brazil; new lithographic sheet operations in Bohai, China; and expanded can-sheet capacity for beverage can ends and tabs in Russia. These investments in three major growth regions will lower costs and position the company well for growth as markets improve in those areas.

In recent years, we have secured long-term power agreements that cover 85% of our operating capacity in primary metals through 2025, with almost two thirds of our energy supplied by renewable power. We also reshaped our portfolio to focus on key strategic assets and industry-leading businesses.

In December 2009, we announced the formation of a joint venture with the Saudi Arabian Mining Company (Ma’aden) to develop a fully integrated aluminum complex in the Kingdom of Saudi Arabia. In its initial phases, the joint venture will develop a 4 million mtpy bauxite mine; a 1.8 million mtpy alumina refinery; a 740,000 mtpy smelter; and a 380,000 mtpy rolling mill. During 2010, the joint venture signed project financing for the smelter and rolling mill and also started construction on the two facilities.

In 2010, our management was committed to achieving the following goals:

• Securing and improving on the savings realized in 2009 from procurement, overhead, and working capital programs;
• Continuing to strengthen the balance sheet using operating cash flows to further reduce debt levels; and
• Optimizing businesses for improved market conditions by continuing to bring the upstream operations down on the cost curve (e.g., the new complex in Saudi Arabia) and positioning the downstream operations in profitable markets.

Over the next few years, our management is committed to achieving the following goals:

• Lowering our alumina business to the first quartile of the industry cost curve by the end of 2015;
• Lowering our aluminum business to the second quartile of the industry cost curve by the end of 2015;
• Adding US$2.5 billion in incremental revenue in our midstream operations (Flat-Rolled Products segment) with better than historical margins by the end of 2013;
• Adding US$1.6 billion in incremental revenue in our downstream operations (Engineered Products and Solutions segment) with improving margins by the end of 2013;
• Limiting our capital expenditures in 2011 to no more than US$1.0 billion in non-growth capital, $0.5 billion in growth capital, and $0.4 billion for our Ma'aden - Alcoa Project;
• Targeting a debt-to-capital ratio in 2011 of 30 to 35%; and
• Generating positive cash flow from operations in 2011 that will exceed capital spending.

In the longer-term, our business strategy is predicated on achieving the following objectives in a sustainable and reliable manner:

• Demonstrate speed and execution in response to changing economic conditions, in line with our three strategic priorities—profitable growth, Alcoa Advantage, and disciplined execution;
• Maintain global leading positions in all of the key upstream, downstream, and midstream business areas;
• Take advantage of our world-class bauxite and alumina positions and continue to secure long-term, low-cost, stranded power (from renewable energy sources, where possible);
• Complete and successfully implement investments in growth projects;
• Continue to improve margins through productivity and value-added products;
• Deliver new products and applications to rapidly expanding markets through innovative and proprietary technology solutions, unique equipment, and complex processes;
• Employ a prudent approach to capital management and commit to cash-conservation actions;
• Continue to conduct business in an ethical manner and obey all laws and regulations;
• Enhance the economic and social well-being of the communities in which we operate; and
• Operate worldwide in a manner that minimizes effects on natural habitats and biological resources.

Please see the Capturing Growth section for more detailed information on how we are driving growth across our business. 

Major Challenges

There are a number of challenges that face our company as we seek to expand our operations and more fully integrate sustainability into our business.

Discussion of the challenges, such as climate change and fatality elimination, can be found in the Sustainability Approach section.

Risk Management

Our risk-management process is structured around the Integrated Framework for Enterprise Risk Management from the Committee of Sponsoring Organizations of the Treadway Commission. It is also in accordance with ISO 31000, the international standard of risk management.

Our process is multi-dimensional and focuses on several factors: type of risk, level of impact, likelihood of occurrence, mitigating factors, and cross functionality. We use a common assessment criterion to define our risk tolerance and to decide how risks should be prioritized.

We use quantitative criteria as a framework that can be adjusted by additional qualitative criteria. The level of impact is not simply a quantitative measure but is very much qualitative, as it measures the impact on the organization from different perspectives. Each of the factors is weighted in determining a total risk score, with more emphasis placed on impact and likelihood.

The risks identified as key are grouped into risk areas and presented to management in the form of a scatter plot diagram. The process is used to analyze all types of business risk, and it is structured using our key business drivers and organizational goals to ensure that all aspects of the business have been covered. Business drivers include our reputation, brand, earnings, and operating margins. Organizational goals include excellence in stewardship of the environment, health and safety, a consistently fair representation of financials, organic growth, and more.

The collaborative process by which risks are managed ensures that each business group remains vigilant of all aspects of risks, and that senior management understands when risks are similar across business or regions and when they might be specific. Our Board of Directors and board committees maintain oversight of our risk management, and management reports on specific risks on a periodic basis.

A discussion of the risks we face can be found in the Form 10-K for the year ended December 31, 2010. Some major risks include the following:

• Material adverse changes in economic or aluminum industry conditions generally, including global supply and demand conditions for aluminum, alumina and aluminum products, and fluctuations, including cyclical or sustained declines, in LME-based prices for primary aluminum;
• Uncertainties regarding the strength, pace, or sustainability of the economic recovery, the risks of another downturn, the effects of government intervention in the markets to address economic conditions, and the impact on Alcoa;
• Changes in the markets served by Alcoa, including automotive and commercial transportation, aerospace, building and construction, distribution, packaging, consumer electronics, oil and gas, defense, industrial gas turbine, and others;
• Significant increases in power or energy costs, including electricity, natural gas, and fuel oil, or unplanned outages or other interruption or unavailability of energy supplies necessary for Alcoa’s operations;
• Significant increases in the costs of other raw materials, including carbon products, caustic soda, and other key inputs, or significant lag effects for decreases in commodity- or LME-linked costs of production;
• Inability to achieve the level of revenue growth, cash generation, cost savings, improvement in profitability and margins, fiscal discipline, or strengthening of operations anticipated from our productivity improvement, cash sustainability, and other initiatives;
• Inability to successfully implement or to realize expected benefits from Alcoa’s growth projects in Brazil, China, Russia, Saudi Arabia, and other countries or from our portfolio streamlining strategy, including divestitures of non-core businesses;
• Further downgrades in our credit ratings, material increases in our cost of borrowing, an inability to access the credit or capital markets, or the failure of financial institutions to fulfill their commitments to Alcoa under committed credit facilities;
• Inability to realize expected benefits from the change to index pricing of alumina;
• Inability to successfully realize the goals established in each of our four business segments or by the dates targeted for such goals, including moving our alumina refining and aluminum smelting businesses down on the industry cost curve and increasing revenues in our Flat-Rolled Products and Engineered Products and Solutions segments;
• Political, economic, and regulatory risks in the countries in which we operate or sell products, including unfavorable changes in local laws or governmental policies, political instability, civil unrest, expropriation, nationalization, commercial instability caused by corruption, and other events beyond Alcoa’s control;
• Impact of changes in foreign currency exchange rates on Alcoa’s costs and results, particularly the Australian dollar, Brazilian real, Canadian dollar, and euro, as some important raw materials are purchased in other currencies while products are generally sold in U.S. dollars;
• Risks associated with the international joint ventures or strategic alliances in which we participate, including the Ma'aden - Alcoa Project, and other large infrastructure construction projects that we undertake or in which we are involved;
• Reduction in Chinese demand for aluminum;
• Highly competitive conditions affecting our markets and products;
• Further metals industry consolidation;
• Adverse changes in Alcoa’s relationships with, or a significant downturn in the business or financial condition of, key customers, suppliers, or business partners;
• Outcomes of significant legal proceedings or investigations, or changes in laws and regulations, or other legal compliance risks and contingencies that cannot be predicted with certainty;
• Costs and liabilities associated with compliance with health, safety, and environmental laws and regulations;
• Potential adverse effects or uncertainties regarding climate change, climate change regulations, and greenhouse effects;
• Adverse changes in discount rates, lower-than-expected investment return on pension assets, and other factors that could affect Alcoa’s results of operations or level of pension funding contributions in future periods;
• Union disputes, work stoppages, or other employee relations issues, or the risk that our human resource talent pool may not be adequate to support our growth;
• Inability to successfully develop and implement technology initiatives;
• Potential negative effects on Alcoa’s business and growth prospects as a result of reductions in our capital expenditures; and
• Unexpected events’ impact on cost of doing business or disruption of operations, such as fires or explosions at facilities, unplanned equipment or other outages, supply disruptions, failure of equipment or processes to meet specifications, natural disasters, war or terrorist activities, or other factors.

Measuring Success

We have a long history of using metrics as a means to drive change within the company. One of the most visible and effective drivers is our strategic sustainability targets, which help guide our businesses and measure our progress toward our vision for sustainability.

Supporting those targets is a variety of systems and processes that collect data from our global operations and make them available to those who need the information to evaluate performance and drive continuous improvement.

For example, we initiated a process in 1988 to collect and display current, detailed information on safety that would be available to all employees who require the information to evaluate performance and drive continuous improvement. We have expanded the original data system to include incident management, and we now use the system for all environmental, health, and safety data collection, incident management, and reporting.

At any time, we can use the system to determine current safety statistics, including accidents or near misses that occur anywhere in the world on a particular day. We can also view detailed reports on incidents, review the corrective action plans or status of a corrective action, and evaluate our progress toward our goals in environment, health, and safety. The system is an excellent management tool that has helped us facilitate our rapid progress in these areas.

As part of our commitment to openness and transparency, we began publishing real-time safety data publicly on www.alcoa.com in 2003 to provide timely insight into our performance on this critical measure.

We continue to work on determining what regional or global metrics are required to guide us toward the achievement of sustainability, particularly in the more complex and difficult-to-measure social aspects of our operations.

 
Industry Leadership

As a leader in the aluminum industry, we believe it is our responsibility to help shape the direction of the industry to ensure it is continually improving and moving toward a more sustainable future. 

One of the ways we do this is through significant participation in industry associations and organizations. Many of our senior leaders and experts serve as officers, committee members, and sources of industry information. Please see our list of stakeholders for more information on our industry participation. 

We also take a leadership position on major issues facing our industry, such as climate change. Not only are we a founding member of the U.S. Climate Action Partnership, we also are a charter member of the World Resources Institute Green Power Market Development Group.

Additional information can be found in the Sustainability Approach section.