Primary Aluminum Consumption
Primary Aluminum Consumption Growth Rates

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2013 Market Conditions
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  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

At the end of 2011, we projected 7% growth in global aluminum demand for 2012.  Demand was on course in the first half of the year, but a slowdown in China in the second half resulted in an actual growth rate of 6%. In addition, London Metal Exchange (LME) pricing levels declined an average of 16% year-over-year. This was due mainly to macroeconomic events, including significant uncertainty of the sovereign debt of many European countries and the U.S. fiscal cliff.


For 2013, we are again projecting 7% growth in the global consumption of primary aluminum.  All regions except North America are expected to have increases of one to three percentage points in aluminum demand over 2012, with China (11%) and India (9%) projected to have the highest growth rates during the year.

However, added production, along with few industry-wide capacity curtailments, will result in supply slightly exceeding demand for primary aluminum in 2013. Growth in global consumption of alumina is estimated to be 9%, and overall demand is expected to slightly exceed supply. We also anticipate improved market conditions for aluminum products in all major global end markets, particularly aerospace, despite declines in certain regions.

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 double between 2010 and 2020.


These trends will benefit aluminum because 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, strength, and durability will continue to propel aluminum’s use as a 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
  2013 Projected Consumption
Millions of metric tons
2013 Projected Demand Growth Rates
China 23.0 11%
Europe 6.5 -1%
North America 6.2 4%
Asia without China 5.9 7%
Other¹ 3.8 7%
India 2.0 8%
Brazil 1.0 4%
Russia 1.0 6%
Global 49.4 7%
2013 Market Conditions
  North America Europe China Global
Aerospace      
Automotive
Heavy Truck & Trailer
Beverage Can Packaging
Commercial Building & Construction
Industrial Gas Turbine      

 

Business Strategy

We faced a number of challenges in 2012, including:

  • Lower realized prices for aluminum and alumina compared to 2011;
  • Significant headwinds for certain input costs, including maintenance supplies and services; labor, especially in emerging markets; transportation costs (mostly fuel oil); and higher pension costs; and
  • A slowdown in aluminum demand growth in China in the second half of 2012.


We addressed these challenges in various ways, including:

  • 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 maintaining a level of capital expenditures consistent with that of 2010;
  • Curtailing 390,000 metric tons of alumina production in the Atlantic refinery system;
  • Fully or partially curtailing 240,000 metric tons of smelting capacity in Europe, and permanently closing 291,000 metric tons of smelting capacity in the United States;
  • Achieving the near-full startup of the Estreito hydroelectric power project in Brazil; and
  • Securing new energy contracts for two U.S. smelters.


In addition to the actions taken to reduce costs, improve cash levels, and preserve liquidity in 2012, we remained focused on our aggressive, strategic targets established at the end of 2010. These targets included:

  • Lowering our alumina refining business to the first quartile and our aluminum smelting business to the second quartile 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 2012, our refining operations were in the 30th percentile and our smelting operations were in the 47th percentile—a four-percentage point improvement for the latter—on their respective cost curves.


Our midstream and downstream operations both achieved margins in 2012 that exceeded historical levels for the second year in a row, and they are making progress against their respective revenue growth targets. Our midstream operations will continue to build on this success in 2013 through the expansion of our rolling facilities in Davenport, Iowa, USA to meet rising U.S. automotive demand due to changing emissions regulations. We also expect volume growth in Russia and China, including emerging markets like consumer electronics. 


Our downstream operations will extend their profitable growth in 2013 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, and we opened a forged wheels facility in Suzhou, China, in December 2012 that will serve the commercial transportation market.

 

In 2012, the aluminum complex being constructed by the Ma’aden-Alcoa joint venture in Saudi Arabia continued making progress, with first metal production from the smelter in December 2012. First production from the rolling mill is expected in 2013, with 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-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 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 International Organization for Standardization’s ISO 31000, the international standard of 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 financials, 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, 2012. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may materially adversely affect us in future periods.