Primary Aluminum Consumption Growth Rates
Primary Aluminum Consumption Growth Rates

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Market Conditions in 2014
2012 Market Conditions
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Capitalizing on Opportunities, Minimizing Risks

 

Our company vision is: Alcoa. Advancing each generation.

 

This vision is supported with our core Values and our business strategy, which incorporates our  sustainability strategy and corresponding strategic sustainability targets. Our strategy also hinges on the significant growth potential that we see in various markets.

 

Aluminum Industry Outlook

Growth in global aluminum demand reached 7% in 2013, which was consistent with our projection at the end of 2012. London Metal Exchange (LME) pricing levels for primary aluminum declined an average of 9% year-over-year.


For 2014, we are projecting 7% growth in the global consumption of primary aluminum, which is consistent with that of the two prior years. All regions except Europe are expected to have 3% to 8% increases in aluminum demand over 2013, with China (10%) expected to have the highest growth rate during the year. (Source: Alcoa analysis as of April 8, 2014)

After considering forecasted added production, along with few industry-wide capacity curtailments, we anticipate a balanced aluminum market in 2014. Growth in global consumption of alumina is estimated to be 9%, and supply is expected to slightly exceed overall demand due to new capacity in Australia, Saudi Arabia, and India, combined with added production in China. We also anticipate improved market conditions for value-add products in the aerospace, building and construction, packaging, and automotive global end markets despite declines in certain regions. However, we expect a decline in the industrial gas turbine global end market in 2014. (Source: Alcoa 2013 Annual Report on Form 10-K.)


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.


These trends will benefit aluminum, as it plays a significant role in the infrastructure of developing economies. Aluminum is the ideal material to make vehicles lighter and for other special applications where aluminum does not have a substitute. Its light weight, high strength, and durability will continue to propel aluminum’s use as the premier material to help the world deal with climate change, particularly as both developing and developed markets look for ways to increase fuel efficiency across industries.
 

Primary Aluminum Consumption
  2014 Projected Consumption
Millions of metric tons
2014 Projected Demand Growth Rates
China 25.2 10%
Europe 6.6 2%
North America 6.4 5%
North Asia 4.2 3%
India 2.1 5%
Southeast Asia 2.0 8%
Middle East and North Africa 2.0 8%
Other¹ 2.0 4%
Brazil 1.1 5%
Russia 1.0 4%
Global 52.6 7%
2014 Market Conditions
  North America Europe China Global
Aerospace      
Automotive
Heavy Truck & Trailer
Beverage Can Packaging
Commercial Building & Construction
Industrial Gas Turbine      

 

Business Strategy

We are a global leader in lightweight metals engineering and manufacturing, as well as the world leader in the production and management of primary aluminum, fabricated aluminum, and alumina combined.


Our operations consist of four worldwide reportable segments: Engineered Products and Solutions (EPS); Global Rolled Products (GRP); Alumina; and Primary Metals. We refer to the EPS segment as downstream, the GRP segment as midstream, and the combined Alumina and Primary Metals segments as upstream.


We faced a number of challenges in 2013, including lower realized prices for aluminum compared to 2012; higher input costs across three of our four business segments; continued weakness in the primary aluminum market; and a number of legacy matters from earlier years.


We addressed these challenges in various ways, including:

  • Continuing our strategy to build out our value-add businesses and lower the cost base in the commodity business, with the value-add businesses driving 57% of our revenues and 80% of our segment profits in 2013;
  • Initiating a permanent shutdown of a combined 146,000 metric tons of smelting capacity in Canada and the United States, and a temporary curtailment of 131,000 metric tons of capacity in Brazil, virtually all of which was completed during the second half of 2013;
  • Continuing previous actions from our cash sustainability program, which began in 2009, to achieve targets related to procurement efficiencies, overhead rationalization, and working capital improvements;
  • Further improving our liquidity position by reducing debt and maintaining disciplined capital spending;
  • More than offsetting cost headwinds with continued net productivity improvements across all operations; and
  • Putting a number of legacy matters behind us, including resolving investigations by the United States government that had been ongoing since 2008 relating to allegations of bribery in securing alumina contracts with a Bahraini company and recording two significant non-cash items consisting of an impairment of goodwill and a charge for valuation allowances on certain deferred tax assets associated with market conditions in the smelting business.


In addition to the actions taken to reduce costs, improve cash levels, and preserve liquidity in 2013, we remained focused on our aggressive, strategic targets established at the end of 2010. These targets included:

  • Lowering our alumina refining business to the 23rd (from the 30th) percentile and our aluminum smelting business to the 41st (from the 51st) percentile of the respective industry cost curves by the end of 2015; and
  • Adding incremental revenue of US$2.5 billion in our midstream operations (Global Rolled Products segment) and US$1.6 billion in our downstream operations (Engineered Products and Solutions segment) with better-than-historical margins by the end of 2013.


At the end of 2013, our refining operations were in the 27th percentile—a three-percentage-point improvement—and our smelting operations were in the 43rd percentile—an eight-percentage-point improvement—on the respective industry cost curves.


We set new strategic targets in late 2013 that build upon the ones established in 2010. The new targets for the refining and smelting operations are to further extend the target reductions related to the cost curves to attain the 21st percentile and 38th percentile, respectively, by 2016. The new targets for our midstream and downstream operations are to increase revenue, while improving margins that exceed historical levels, by US$1.0 billion and US$1.2 billion, respectively, by 2016. 


A portion of the revenue increase for our midstream operations is expected to be generated from the expansion of our rolling facilities in Davenport, Iowa, USA (beginning in 2014) and in Tennessee, USA (beginning in 2015) to meet rising U.S. automotive demand due to changing emissions regulations. Another portion will be generated from the construction of the rolling mill as part of the joint venture in Saudi Arabia (which began in 2013, with additional automotive capacity by the end of 2014). 


Our downstream operations will extend their profitable growth in 2014 through continued innovative solutions to meet a wide range of customer needs. We are expanding our aluminum-lithium capabilities in Lafayette, Indiana, USA, to meet the growing demand in the aerospace market.


In 2013, the aluminum complex being constructed by the Ma’aden-Alcoa joint venture in Saudi Arabia continued making progress, as the smelter produced 190,000 metric tons while continuing to ramp-up to full operational capacity. The rolling mill produced its first hot coil at the end of 2013, with first production from the mine and refinery following in 2014.


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, midstream, and downstream business areas;
  • Take advantage of our world-class bauxite and alumina positions and continue to secure long-term, low-cost power (from renewable energy sources, where possible);
  • Complete and successfully implement investments in growth projects;
  • Continue to improve margins through productivity and value-add 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;
  • 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.

 

Major Challenges

There are a number of challenges that face our industry and our company as we seek to maximize the value we provide to all of our stakeholders, expand our operations, and more fully integrate sustainability into our business. These include:


Details on how we are approaching these challenges can be found at the links provided.

 

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 the International Organization for Standardization’s ISO 31000 (risk management).


We use the process to identify and evaluate a broad spectrum of risks. 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 financial information, organic growth, and more.  


The risks identified are grouped into risk areas and presented to management to determine how they should be prioritized. Our process is multi-dimensional and focuses on several aspects, including likelihood of occurrence, level of impact, and mitigating risk factors. Each is considered in assessing and prioritizing risk, with more emphasis placed on likelihood and impact.

The collaborative process by which risks are identified, evaluated, and managed ensures that senior management remains vigilant of key risks impacting the company. The Alcoa Board of Directors maintains oversight of our risk management, and our management reports on specific risks on a periodic basis.

A discussion of the significant risks we face can be found in our Form 10-K for the year ended December 31, 2013. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may materially adversely affect us in future periods.

Any forecast set forth in this section speaks as of the date it was originally presented. Alcoa is not updating or affirming any of the forecasts as of today’s date. The provision of this information shall not create any implication that the information has not changed since it was originally presented.