By Andy Home/London

Alcoa is synonymous with aluminium. The clue is in the name. Aluminum Company of America was born in 1907 after a change of name from the original Pittsburg Reduction Company, although even in 1888 the company’s founders had initially toyed with the name of Pittsburg Aluminium Company.
One of those founders was Charles Martin Hall, who filed his US patent for the new light-weight metal in February 1886, three months ahead of Frenchman Paul Heroult.
Just who got there first was the subject of a protracted patent dispute but their joint efforts are now recognised in the name of the technology used to produce the metal, the Hall-Heroult process.
But aluminium has proved an unruly child for Alcoa. While its usage booms, its price languishes.
It is a modern raw material success story but the actual business of making the metal is a war-zone, characterised by structural excess capacity, chronic over-production and depressed margins.
It’s not hard to understand, therefore, why Alcoa has decided to split its integrated business model into two parts, the high value-add downstream business, recently boosted by the company’s diversification into other modern-age metals such as titanium, and the upstream business.
Indeed, analysts have long called for such a move and the collective approbation was evident in the sharp jump in Alcoa’s share price after Monday’s announcement.
But for the upstream company, which will retain the Alcoa name, the immediate outlook is for more trench warfare.
“Don’t think of it just as the aluminum price,” Klaus Kleinfeld, Alcoa Chairman and Chief Executive Officer, told analysts on Monday’s conference call in response to a question about the proposed upstream company’s exposure to market forces.
“Think of it also as the alumina price,” he said, adding: “There is a separate bauxite price, there are separate energy prices, the casthouses don’t get paid for the aluminum, they get paid for the value-add.”
And that’s true. Alcoa has a global foot-print at every stage of the aluminium supply chain, from mining the bauxite, through refining that material into alumina and smelting the alumina into metal, to then transforming it into shapes that can be used by automakers and other manufacturers.
It also has 1,550 megawatts of power production capacity. Only around 30% of that is actually used in the energy-intensive smelting process, allowing it to sell the balance into power markets.
In terms of pricing, Alcoa has itself taken the lead in fracturing supply-chain pricing, forcing the alumina market to break its historic linkage with the price of metal as traded on the London Metal Exchange (LME).
It has aggressively pushed its third-party alumina customers into either spot or index-linked pricing to the point that only a residual 25% of sales are now priced the old way, as a percentage of the LME metal price.
But, just as aluminium is embedded in the company’s name, Alcoa can’t lose the problematic lynch-pin that sits at the heart of the supply chain, running aluminium smelters.
Right now the price of LME benchmark three-month aluminium is trading around $1,550 per tonne, close to last month’s low of $1,506.
That was the lowest level seen since the dark days of the Global Financial Crisis, when the price dipped below $1,300 during the manufacturing implosion that followed the credit market implosion.
Pricing pain was mitigated during the physical premium bubble that evolved over the course of 2012-2014. Premiums went supernova, flexing out to over $500 per tonne over and above the LME price, allowing producers such as Alcoa to capture a better “all-in” price for their product.
But premiums collapsed in the early months of this year.
Alcoa has castigated the LME for changing its warehouse rules, which reduced the load-out queues that were blamed by aluminium users for those high premiums.
It has even castigated the US regulator the Commodities and Futures Exchange Commission for leaning on the LME to do so.
But the market is still the market.
The CME’s October premium contract, indexed to Platts’ assessment of the Midwest US market, is just 7.0 cents per pound and the same-dated “all-in” contract is just $1,629 per tonne.
Moreover, no-one expects any significant improvement any time soon.
Indeed, analysts at Macquarie Bank recently went as far as saying “we see no rationale for aluminium prices to trade anywhere near $2,000/t this decade.”
Which means, to borrow the title of an August research paper from Goldman Sachs, “Aluminium producers face longest period of pain for a generation.”
Alcoa can make a convincing case that it has already prepared its upstream business for such pain.
The company has since 2007 mothballed, closed or sold a massive 1.4mn tonnes of aluminium production capacity, around one third of its total smelter system.

*Andy Home is a columnist for Reuters. The opinions expressed are his own.