Can the new Alcoa add up?
For most of its 127 years, Alcoa has done only two things. Now Klaus Kleinfeld wants to change that.
|||New York - For most of its 127 years, Alcoa has done two things: it’s made aluminium, and it’s made stuff out of aluminium.
Now Klaus Kleinfeld wants to change that with a bold - and potentially risky - plan to cleave the aluminium giant in two.
A symbol of American industrial might through the 20th Century, Alcoa said on Monday that it would separate its shrinking, legacy aluminium business from its growing downstream operations, which focus on making products for industries including autos and aerospace.
Whether dividing Alcoa into separate companies will pay off is far from certain. Kleinfeld, the chief executive, wants to decouple the highly-engineered lines from legacy operations that have been hurt by the collapse in world commodities prices.
That risks alienating investors who sought diversification: the industrial side of the business has offset unreliable cash flows from the commodity side in the current downturn. While Alcoa’s shares rose 5.7 percent on Monday, its bonds tumbled.
And while hiving off smelters might seem smart now when commodity prices are so low, prices will rebound in years ahead once demand all-but-inevitably picks up enough to match output.
“The commodity business will be worth a lot more than it is today at some point in the future,” Lloyd O’Carroll, a Richmond, Virginia-based analyst at CRU Group, said in an interview on Monday. “It is a viable business, a competitive business and a highly cyclical business.”
One thing is certain: aluminium producers are hurting right now. Led by mills in China, the industry has been churning out so much aluminium that the world has been awash with it for a decade. Profits are scarce: about half of all production is losing money at current prices, according to Macquarie Group.
For Kleinfeld, the split marks the culmination of a strategy he pursued since taking the reins in 2008: relentlessly emphasising value-added products while rationalising a commodity business that was once the world’s largest by volume. As CEO of the new manufacturing company, he can ease off his promotion of the “miracle metal”.
“Aluminium will still play a very, very important role, but we have become this multi-material lightweight metal specialist,” Kleinfeld said in an interview. “That has been our success story.”
BLOOMBERG