Alcoa Inc (AA) Looks to Increase Margins Amid Lower Prices

In order to improve its margins, Alcoa Inc (NYSE:AA) is also developing an $11 billion plant in Saudi Arabia, which is going to be its most cost effective facility in the world for producing aluminum.

However, the supply issues are going to persist. According to Bloomberg’s data, in 2012 the total supply exceeded demand by 906,440 tons. For 2013, the biggest aluminum consumer, China, is going to produce 350,000 tons of more aluminum than it will consume. The surplus is therefore expected to keep a lid on price levels. China becoming a net exporter of aluminum makes for a difficult environment amid slowing global growth.

For 2013, commodity prices are signaling continued low growth while emerging markets like Southeast Asia continue to evolve into larger market players and will be able to do so with strongly appreciating currencies if their central banks continue to hold the line against monetary debasement in the West. China’s producers will feel the sting of a rising yuan as they try to dump excess production on the region. They may well have to sell at a loss to compete with players like Alcoa Inc (NYSE:AA), BHP Billiton Limited (ADR) (NYSE:BHP) and Rio Tinto plc (ADR) (NYSE:RIO). In any case until the industry mothballs at least another 5% of its current production the market will favor those that resist fighting the competitive devaluation war. If commodity inflation begins anew it will occur in oil before aluminum given the current market structure, which will put a heavy strain on future growth.

The article Alcoa Looks to Increase Margins Amid Lower Prices originally appeared on Fool.com and is written by Peter Pham.

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