Chinese aluminum companies face two main problems; one derived from a lack of raw materials, and the other related to the price of energy sources. In China, electricity prices are set by the government, and this issue requires constant negotiation between power companies with lower rates and Aluminum Corp. of China Limited (ADR) (NYSE:ACH) to keep electricity costs low.
As part of its expansion projects, Aluminum Corp. of China Limited (ADR) (NYSE:ACH) wants to reduce its reliance on third-party suppliers of bauxite. In 2010, the company bought a large stake in Rio Tinto plc (ADR) (NYSE:RIO)‘s mineral project in Guinea, which will come into production in 2015. This initiative should reduce costs and avoid procurement variability.
However, the company’s balance sheet is not yet showing much optimism. For the first quarter of 2013, Aluminum Corp. of China Limited (ADR) (NYSE:ACH) posted a net loss of $159 million, which is an improvement compared to the prior-year’s net loss of $177 million but is still a factor of concern if demand remains stagnant.
Conclusion
Many analysts argue that the prices of aluminum and alumina will continue falling. Hence, aggressive cost-cutting action and production capacity shutdowns seem appropriate strategies to counter falling demand. These cuts could improve aluminum-industry fundamentals, pushing down the supply and increasing prices.
For some companies, integrating vertically could improve the situation. An expansion of the rolled and engineered product businesses will give the companies access to a more sophisticated and diversified market.
Considering this, I believe Alcoa Inc (NYSE:AA) possesses a more integral strategy than its peers. The company’s size provides it with strategic advantages as well, such as lower input costs and access to markets with better perspectives. This gives Alcoa a solid kit to drive the crisis. Healthy demand in the aerospace market will be key to drive results moving ahead, and Alcoa Inc (NYSE:AA) is positioned to profit from it.
On the contrary, Alumina Limited (ADR) (NYSE:AWC) and Aluminum Corp. of China Limited (ADR) (NYSE:ACH) are strongly linked to primary segments of the aluminum industry, and lows prices in bauxite and alumina will have a direct impact on their sales and earnings with no possibility to escape from it in the medium term.
Since Chinalco is among the lower-cost players, and considering its stake in bauxite production, I would invest in the company thinking only in the very long term. For the short term, it will have to improve its balance sheet and wait for a recovery in prices; production cuts are not enough.
The article 3 Big Aluminum Companies to Analyze originally appeared on Fool.com and is written by Louie Grint.
Louie Grint has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Louie is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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