Alcoa 2010 Annual Report Download - page 63

smelter (44 kmt-per-year) in Italy as a result of uneconomical power prices. In June 2010, Alcoa halted production at
the Avilés smelter (93 kmt-per-year) in Spain due to torrential flooding. Production was restarted a few months after
the flood and the smelter was at full operating rate by the end of 2010. Base capacity dropped 295 kmt between
December 31, 2010 and 2009 due to the previously mentioned permanent curtailments. The decision to permanently
curtail these facilities was made after a comprehensive strategic analysis was performed to determine the best course of
action for each facility. Factors leading to this decision included current market fundamentals, cost competitiveness,
other existing idle capacity, required future capital investment, and restart costs, as well as the elimination of ongoing
holding costs.
At December 31, 2009, Alcoa had 1,234 kmt of idle capacity on a base capacity of 4,813 kmt. In 2009, idle capacity
increased by 480 kmt compared to 2008 due to the completion of targeted curtailment reductions, including the
Tennessee smelter (215 kmt-per-year), the Massena East, NY smelter (125 kmt-per-year), and 140 kmt at various other
smelters, in response to the significant decline in LME prices and aluminum demand both as a result of the then global
economic downturn. Base capacity rose by 282 kmt at December 31, 2009 as compared to December 31, 2008 due to
the March 31, 2009 acquisition of two smelters in Norway, in which Alcoa previously held a 50% equity interest.
In 2010, aluminum production increased by 22 kmt, mostly due to the smelters located in Norway, as well as a number
of small increases at other smelters, but was virtually offset by the smelter curtailments in Tennessee, Massena East,
and Fusina and the halted production at the Avilés smelter. In 2009, aluminum production declined 443 kmt, mainly
the result of the effects of smelter curtailments that began mid-2008, including the smelters in Rockdale (267
kmt-per-year), Tennessee, and Massena East, all of which was partially offset by an increase in production at the
Iceland smelter (344 kmt-per-year), as this smelter was not at full capacity until April 2008, and the acquisition of the
Lista (94 kmt-per-year) and Mosjøen (188 kmt-per-year) smelters in Norway.
Third-party sales for the Primary Metals segment climbed 35% in 2010 compared with 2009, mainly due to a 27% rise
in average realized prices, driven by 31% higher average LME prices, and the acquisition of the smelters located in
Norway (increase of $332), slightly offset by a decline in both buy/resell activity and volumes. Third-party sales for
this segment decreased 35% in 2009 compared with 2008, mostly the result of a 32% drop in realized prices, driven by
a 35% decline in LME prices, slightly offset by sales from the acquired smelters in Norway (increase of $452).
Intersegment sales for the Primary Metals segment rose 41% in 2010 compared with 2009, mainly as a result of an
increase in realized prices, driven by the higher LME, and an increase in buy/resell activity. Intersegment sales for this
segment declined 53% in 2009 compared with 2008, mostly due to a drop in realized prices and a decline in volume
due to lower demand from the midstream and downstream operations.
ATOI for the Primary Metals segment improved $1,100 in 2010 compared with 2009, principally related to the
significant increase in realized prices; the absence of a charge related to a European Commission’s decision on
electricity pricing for smelters in Italy ($250); and continued benefits from cost savings initiatives, particularly coke
and pitch; somewhat offset by much higher alumina and energy prices; the absence of a gain related to Alcoa’s
acquisition of the other 50% of the smelters in Norway ($112); and net unfavorable foreign currency movements due to
a weaker U.S. dollar.
ATOI for this segment declined $1,543 in 2009 compared with 2008, primarily due to the significant drop in realized
prices; a charge related to a European Commission’s decision on electricity pricing for smelters in Italy ($250); a
decline in intersegment sales volume; the impact of curtailing operations; and additional power costs related to smelters
in Italy as a result of the termination of the then existing power tariff structure under legislative authority of the Italian
Parliament ($15); all of which was partially offset by procurement and overhead cost savings across all regions; lower
costs for alumina; net favorable foreign currency movements due to a stronger U.S. dollar; and a gain related to the
acquisition of two smelters in Norway ($112).
In 2011, the following trends are expected to continue: pricing will follow a 15-day lag on the LME, higher energy and
raw material costs, and productivity improvements. Also, Alcoa plans to restart certain idled potlines at three smelters
located in the U.S.: Massena East (three potlines or 125 kmt-per-year); Wenatchee, WA (one potline or 43
kmt-per-year); and Ferndale, WA (Intalco: 36 kmt-per-year). These restarts are expected to increase Alcoa’s aluminum
production by 137 kmt during 2011 and by 204 kmt on an annual basis thereafter and are occurring to help meet
anticipated growth in aluminum demand and to meet obligations outlined in power agreements with energy providers.
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