Aluminium industry producers operate in one of the most power intensive industries, where producers have to look closely at the energy sources that power their smelting plants. Currently, traditional coal-based smelting plants are under close watch due to stringent emission norms and anticipated pricing of carbon. Alcoa (AA, Financial) has adopted the cost structure to aggressively exit coal-based power for the smelting process. Not only has it taken strategies to reduce its manufacturing costs, but also add value to its line of business by making aluminium alloys for the aerospace industry. Let us dive further to find out how Alcoa is working towards the path of adding additional value to its business as an aluminium producer.
Reducing the operational costs
To shift from coal for power production in the smelting process, Alcoa has shifted to generation of smelting energy from renewables. Presently, nearly 75% of the Alcoa's smelting energy is sourced from renewables. The company has also shut down the Port Henry plant in Australia and the Italian Portovesne smelter, because both were high cost manufacturing sites. This has led to a cut of 25% in the overall aluminium production for Alcoa, while there has been a shift from coal to hydroelectric power supply for the smelting process.
The company has not only addressed the huge manufacturing costs linked to the smelting process, but has also been the leader in adding value downstream by expanding its presence in high value advanced manufacturing.
Peek into aerospace sector
For accelerating its growth pace in the portfolio transformation process, the company signed a definitive agreement to acquire Firth Rixson in June, which is a global leader in aerospace jet engine components, for $2.85 billion in cash and stock. Under the terms of the deal, Alcoa would purchase Firth Rixson for $2.35 billion in cash, plus $500 million of company stock and an additional $150 million potential earn-out.
With the acquisition, Alcoa wants to add value to its aluminium business by production of aluminium alloys that would be used for building a broader range of high-growth, value-added jet engine components. Alcoa Chairman and CEO, Klaus Kleinfeld, stated – “The acquisition of Firth Rixson is a major milestone in Alcoa’s transformation, this transaction will bring together some of the greatest innovators in jet engine component technology; it will significantly expand our market leadership and growth potential. Firth Rixson increases the earnings power and broadens the market reach of our high-value aerospace portfolio and will deliver compelling and sustainable value for customers and shareholders.”
Capitalizing the strategic alliance
Since Firth Rixson has a strong portfolio of world-class assets that complements and deepens Alcoa’s penetration in the vast aerospace market, this transaction is expected to enable Alcoa to capitalize on strong growth in the commercial aerospace sector. Alcoa projects a compounded annual commercial jet growth rate of 7% through 2019, and oversees a current nine-year production order book at 2013 delivery rates.
Alcoa has generated about 57% of the revenues last year in this area of business which is into advanced manufacturing by developing aluminium alloys and advanced carbon fibers for jet engines, industrial gas turbine aerofoils, aerospace and defense and commercial architecture.
On the supply side, Alcoa is seeking to produce a mixed range of materials – including aluminium it could be like the smart alloys, for example, aluminium/nickel/titanium, and recently lithium-aluminium corrosion resistant and damage tolerant products for the aircraft industry.
Aerospace has been the star add-on performer for Alcoa with 8% to 9% sales growth predicted in 2014 in this segment, from $4 billion as overall revenue in 2013.
Concluding thoughts
Alcoa is playing on its innovative strengths in aluminium alloys and carbon fiber technologies, with special focus on the aerospace industry. The company wants to create a turnaround in its business and is clearly outpacing competition by playing with aluminium for manufacturing lighter products which can be aptly used by the aerospace giants round the globe. Indeed, Alcoa is proving to be high on the transformational process for adding value to its aerospace line of business in the days ahead.
