Alcoa 1997 Annual Report Download - page 34

14.1
17.3
26.7
33.8
39.7
63.4
60.2
72.0
76.8
81.6
49.3
42.9 45.3 43.0 41.9
■ Non a lu m in u m
■ Alu m in a a n d Alu m in um
Nu m ber o f Em p loye e s
in t h ou sa n d s a t yea r-e n d
Grow th in th e a u t om ot ive
ele ctrica l com pon en t s
bu sin es s re su lt ed in th e
h irin g of n ea rly 7,000 a ddi-
tion a l e m ploye es in 1997.
9796
95
9493
896
988
1,206
1,015
1,207
U.S. Exp o rt s
m illion s of d olla rs
97
96
95
94
93
High er s h ipm en t s of a u t o-
m ot ive e lectr ica l com po-
n e n ts a n d rigid con ta in er
sh e et lea d th e reb ou n d in
exp or t sa les.
32
Ris k Fa cto r s
Th e follow in g d iscu s sion a bou t t h e com p a ny’s r isk m a n agem e n t
act ivit ies in clu des for ward-lookin g statem ents t hat involve r isk a nd
u n ce r t aint ies. Act u al r esu lt s cou ld d iffer m ate r ia lly fr om th os e
p roje cte d in th e for w ard-lookin g st at em e nt s.
In add it ion to in heren t operat ing r isks, Alcoa is exp osed to
fin a n c ia l , m a r ket , p olit ica l a n d e co n om ic r isk s.
Com modity Price Risks — Alcoa is a le ad in g glob al p r odu ce r of
a lu m inu m in got a nd a lu m in u m fab r icat ed p rodu ct s. Alu m in u m
in got is a n in te r n at ion a lly p r odu ce d , p r ice d , a n d t ra de d com m od it y.
Th e pr in cipa l t radin g m arket for in got is th e Lon don Metal Exch a n ge
(LME) . Alco a p a r t icip at es in t h is m a rket by bu y in g a n d sellin g fu t u re
p or t ion s of it s a lu m in u m re qu ire m e nt s a nd ou t pu t .
For a lu m inu m p r ice r isk m a nagem e nt p u r pos es, Alcoa d ivides it s
op erat ion s into fou r region s: U.S., Pacific, Oth er Am er icas an d Eu rope.
AofA in t h e Pac ific r eg ion a n d Alu m in io in t h e Ot h e r Am e r ica s
a re gen e ra lly in n et lon g m et a l p os it ion s. From t im e t o t im e, t h e y
m ay sell p rodu ct ion for ward . Operat ion s in th e Eu rop ea n region
a re gen e ra lly n et m et a l sh or t a n d m a y p u rch a se for w ar d p os it ion s
per iod ica lly. Histor ically, for ward p u rcha se an d sales act ivit y w ith in
th ese th ree r egion s h as n ot b een m ater ial.
In t h e n or m a l cou r se of b u sin es s, Alco a e n te rs in to lon g-te r m
con t r act s w it h a n u m b er of it s fa br icat ed p r odu ct s cu st om e r s. At
Dece m b er 31, 1997 a n d 1996, s u ch con t ract s a p p rox im a te d 2,093,000
m t a n d 2,369,00 0 m t , r e s p e ct ive ly. Alco a m a y e n t e r in t o sim ilar
a r ra n gem e nt s in t h e fu t u re. In o rde r t o h ed ge t h e r isk of h igh e r
pr ices for th e an t icipate d m et al p urch ases r equ ired to fu lfill t hese
lon g-ter m cu st om er cont racts, Alcoa e nter s in to lon g posit ion s,
pr in cip ally u sin g fut u res a nd op t ion s. Alcoa follow s a st able p at ter n
of pu rch as in g m et a l; t h er efore, it is h igh ly likely t h at a nt icip ate d
m et a l r equ ire m e n t s w ill b e m et . At De ce m b e r 31, 1997 a n d 1996,
th ese cont ract s tot aled ap p rox im ately 1,084,000 m t an d 872,000 m t ,
r esp e ct ively. A h y p ot h e t ica l 10% ch a n ge fr om t h e 1997 ye a r-e n d ,
th re e-m on th
LME a lu m in u m in got p r ice of $1,552 p er m t w ou ld resu lt
in a p ret a x ga in or los s to fu t u re e ar n in gs of $170 r elate d to t h es e
co n t r act s. How e ve r, it s h ou ld b e n ot e d t h a t a n y ch a n ge in t h e va lu e
of t h es e con t ract s, r ea l or h yp ot h et ica l, w ou ld be s ign ific a n t ly
offs et by a n inve rs e ch a n ge in t h e co st of pu rch a se d m et a l.
Ea r n in gs we re select ed a s t h e m ea su r e of s en s it ivit y du e to t h e
h istor ical relat ion sh ip b etw ee n alu m inu m ingot pr ices a nd Alcoa’s
ear n in gs. Th e hyp ot h et ical ch a n ge of 10% w a s ca lcu la t ed u sin g
a p a ra llel sh ift in t h e ex ist in g Dece m b er 31, 1997 for w ar d p r ice cu r ve
for a lu m in u m in got . T he p r ice cu r ve t ake s in to accou n t t h e t im e
va lue of m on ey, a s well a s fut u re exp ect at ion s regard in g t he pr ice
of alu m in u m in got . T he m odel a ls o a ssu m es t h er e w ill be n o
a lu m inu m sm elt er cap acit y r est ar t ed b y Alcoa .
T h e fu t u r es a n d op t io n s con t ra ct s n ot e d ab ove a r e w it h c re d it-
wor t h y cou n te r pa r t ies a n d a re fu r t h er su pp or t ed by ca sh , t rea su r y
bills or ir revo cable let te rs of cr ed it issu ed by ca refu lly ch os en b an k s.