Alcoa 2014 Annual Report Download - page 19

Creating a Globally Competitive Commodity Business
Alcoa pioneered the aluminum industry over 125 years ago, and today we produce best-in-class
bauxite, alumina and primary aluminum products. As part of the Company’s transformation,
we have taken aggressive steps within our commodity portfolio to lower costs and become
increasingly competitive.
In Primary Metals, Alcoa closed or sold smelting capacity in Australia, Italy and the United
States, and curtailed capacity in Brazil. In all, Alcoa has reduced 31% of its highest-cost global
operating smelting capacity since 2007, supporting the Company’s goal to improve its position
on the global aluminum cost curve to the 38th percentile by 2016 from the 51st percentile in
2010. Recognizing how deeply closures impact our workforce, the Company provided support
to affected employees. In addition, the Alcoa Foundation often provides support to affected
communities. As an example, at Point Henry in Australia, the Foundation contributed $559,000
combined to six organizations located in Geelong, Victoria.
We also took decisive steps to improve our alumina cost position by selling our ownership stake
in a bauxite mine and alumina refinery joint venture in Jamaica and announcing a strategic
review of a refinery in Suriname. Divesting, or closing, high-cost refining capacity supports the
Company’s goal to lower its position on the global alumina cost curve to the 21st percentile by
2016 from the 30th percentile in 2010.
The exciting end market growth enjoyed by our multi-material, innovative midstream and
downstream businesses is also driving growth in our upstream portfolio through value-add
casthouse products. Casting aluminum into slabs that are then rolled into aluminum sheet
supports automotive growth, while producing aluminum in billet form serves growing extrusion
markets, like nonresidential building and construction. The commodity business is also creating
new value for customers through specialty foundry alloys, initially for auto castings. These higher
value-add products increased from 57% of total primary aluminum shipments in 2010 to 65%
in 2014, and are expected to rise to 70% in 2016.
We are also growing margins by continuing to shift the pricing of smelter-grade alumina to
an Alumina Price Index (API) that better reflects market fundamentals than London Metal
Exchange-based pricing. We increased API and spot-priced smelter grade alumina to 68%
of third-party shipments in 2014, up from 5% in 2010. In 2016, we forecast that on average
84% of our third-party alumina shipments will be based on API or spot pricing.
In Saudi Arabia, the Ma’aden-Alcoa joint venture, the lowest-cost aluminum complex in the
world, progressed as planned. In 2014, the smelter became fully operational and generated
profits in the second half of the year, and the refinery produced its first alumina.
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28%
37%
55%
68%
75%
84%
2010 2011 20132012 2014
5%
2015E 2016E
API/Spot Pricing as a %
of third-party shipments
ALUMINA PRICE INDEX (API)
SLAB CASTING
SUPPORTING
AUTOMOTIVE
GROWTH
BILLET
PRODUCTION
SERVING
GROWING
EXTRUSIONS
MARKETS
3