Recent reports suggest that the Chinese government may look to stem overcapacity in the aluminum industry by suspending approval of new smelters. This is good news for Alcoa ( AA ), one of the world's largest suppliers of alumina.
According to the China Nonferrous Metals Industry Association (as cited by the Shanghai Daily), China produced just under 18 million tons of aluminum last year. This represents roughly 85% of total capacity, which stands at around 21 million. Other reports suggest that capacity utilization actually fell closer to 60%. Whether the actual number falls closer to 60% or 85%, the overcapacity of the industry is evident.
The demand for aluminium has seen 15-20% annual growth over the past five years, which has fueled the emergence of new aluminum smelters. Curbs on aluminum production will help existing firms by lifting aluminum spot market prices, resulting in greater profit margins for these companies.
Alcoa's primary metals segment consists of the company's worldwide smelter system. The produced primary aluminum is used by Alcoa's fabricating businesses as well as sold to external customers, aluminum traders, and in the commodity markets. Alcoa's primary metals segment accounts for 41% of our $17.68 price estimate for Alcoa stock , which is roughly in line with market price.
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