Alcoa 2012 Annual Report Download - page 71

This segment represents a portion of Alcoa’s upstream operations and consists of the Company’s worldwide refinery
system, including the mining of bauxite, which is then refined into alumina. Alumina is mainly sold directly to internal
and external smelter customers worldwide or is sold to customers who process it into industrial chemical products. A
portion of this segment’s third-party sales are completed through the use of agents, alumina traders, and distributors.
Slightly more than half of Alcoa’s alumina production is sold under supply contracts to third parties worldwide, while
the remainder is used internally by the Primary Metals segment.
In 2012, alumina production decreased by 144 kmt compared to 2011. The decline was mainly driven by lower production
in the Atlantic refinery system as a result of management’s plan to reduce annual production capacity by approximately
390 kmt. This decision was made to align production with smelter curtailments initiated at the beginning of 2012 and to
reflect prevailing market conditions. The decrease at these three refineries was partially offset by higher production at the
Pinjarra and Kwinana refineries in Australia, due to system process improvements.
In 2011, alumina production increased by 564 kmt compared to 2010. The improvement was mostly the result of
higher production at the São Luís (Brazil) refinery, as the ramp-up of the 2,100 kmt expanded capacity (the Alumina
segment’s share is approximately 1,100 kmt-per-year) that began in late 2009 continued through 2011.
Third-party sales for the Alumina segment dropped 11% in 2012 compared with 2011, primarily related to a 15%
decline in realized prices, driven by a decrease in contractual LME-based pricing, slightly offset by realized benefits
from moving customer contracts to alumina index pricing and from improved spot pricing. Third-party sales for this
segment improved 23% in 2011 compared with 2010, largely attributable to a 21% increase in realized prices, driven
by the movement of customer contracts to alumina index pricing, benefits from improved spot prices, and improved
pricing from LME-based contracts.
Intersegment sales for the Alumina segment decreased 15% in 2012 compared with 2011, principally due to lower
realized prices and decreased demand from the Primary Metals segment. Intersegment sales for this segment climbed
23% in 2011 compared with 2010, primarily the result of higher realized prices and an increase in demand from the
Primary Metals segment.
ATOI for the Alumina segment dropped $517 in 2012 compared with 2011, mostly due to the previously mentioned
lower realized prices, higher input costs, particularly caustic and fuel oil, and the absence of a gain on the sale of land
in Australia ($30), somewhat offset by net productivity improvements and net favorable foreign currency movements
due to a stronger U.S. dollar, especially against the Brazilian real.
ATOI for this segment increased $306 in 2011 compared with 2010, mainly caused by the significant improvement in
realized prices and a gain on the sale of land in Australia ($30), partially offset by considerably higher input costs,
particularly related to caustic and fuel oil, and net unfavorable foreign currency movements due to a weaker U.S.
dollar, especially against the Australian dollar.
In 2013, the continued shift towards alumina index or spot pricing is expected to average 48% of third-party sales,
while those still contractually linked to the LME will follow a 30-day lag. Additionally, net productivity improvements
are expected to continue.
Primary Metals
2012 2011 2010
Aluminum production (kmt) 3,742 3,775 3,586
Third-party aluminum shipments (kmt) 3,056 2,981 2,845
Alcoa’s average realized price per metric ton of aluminum $ 2,327 $ 2,636 $2,356
Third-party sales $ 7,432 $ 8,240 $7,070
Intersegment sales 2,877 3,192 2,597
Total sales $10,309 $11,432 $9,667
ATOI $ 309 $ 481 $ 488
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