The US aluminum giant Alcoa Inc. (AA) has recently announced that it has expanded its aluminum can recycling capacity at its Tennessee operations by investing $24 million. This expansion would ramp up Alcoa’s recycling capacity by about 50% from the current capacity of 54%. The expansion is in line with the company’s aim to expand its aluminum can recycling capacity to 75% by 2015 in North America. 

Aluminum cans are most widely used in the packaging industry, as these can be recycled. However, the major concern of aluminum producers is the large amount of energy that is consumed in the process of manufacturing aluminum cans. This cost accounts for nearly 30% of the total cost of aluminum can production. 

Alcoa believes that the recycling of these cans would help aluminum producers to reduce their power consumption by 95%. A higher amount of energy is required to make aluminum cans from raw aluminum compared to recycling the same. 

Alcoa is the world’s leading producer of primary aluminum, fabricated aluminum and alumina. The improving environment for aluminum and alumina prices, coupled with higher downstream volume, inspires optimism about its top-line growth. 

China and India are undergoing rapid industrialization. Both of these factors are positive for improving aluminum demand. We expect aluminum demand to increase over the next three years, outstripping supply growth. As a result, the aluminum market is likely to see a deficit for a prolonged period. This should drive alumina and aluminum prices high. 

The greatest risk to Alcoa is any significant decline in aluminum prices in 2010. If the global economy worsens further, demand for aluminum and aluminum-based products would also likely slow, thereby pulling down Alcoa’s shipments and revenues. We expect rising energy and raw material costs to continue constraining margin expansion. The company will pay more to purchase important supplies of oil, natural gas, caustic soda, carbon and resin. 

Beyond cost concerns, currency issues are negatively impacting Alcoa s operating results. Management believes Alcoa’s operations in Australia, Canada and Europe will be negatively impacted by the appreciation of these home currencies versus the U.S. dollar.
 
We reaffirm our Neutral recommendation on Alcoa Inc.
Read the full analyst report on “AA”
Zacks Investment Research