The Aluminum Industry CEO Agenda, 2013–2015

Aluminum is a metal characterized by abundance because of its availability as a naturally occurring element and its use in everything from sophisticated aerospace components to commonplace consumer products. This characteristic extends to the industry that produces aluminum. While industry executives enjoy an abundance of market opportunities for their product, they have also experienced an abundance of severe challenges in recent years.

Analyses of the aluminum industry’s performance reveal the emergence of significant issues that are likely keeping many aluminum-industry executives awake at night. Chief among their concerns are the sharp decline in company valuations and profits and the depressed price of aluminum.

The market capitalization of the top international aluminum companies has dropped by about 65 percent over the past five years. Earnings before interest and taxes margins have decreased by about 5 percentage points, a disturbing trend for an industry that’s among the world’s most capital intensive. The copper industry needs to invest, on average, $14,000 per ton of primary output from mine to metal, compared with $8,000 per ton of aluminum for capital related to mines, refineries, and smelters. However, if the value of the produced metal is included in the calculation, aluminum is twice as capital intensive as copper (as well as steel). As margins dwindle, the aluminum industry sits on a very expensive asset base that needs higher profits to generate sufficient returns.

The decline in company valuations and profits was driven by a severely depressed price for primary aluminum. Compared with other metals, aluminum entirely missed the “commodity super cycle.” Since January 2000, the price of primary aluminum has increased by just 20 percent, compared with more than 100 percent for steel and almost 350 percent for copper. When adjusted for inflation, aluminum is actually valued below its 2000 price, which is especially striking because prices for other raw materials have enjoyed a substantial premium in recent years. The gap is even more dramatic for the feedstock for primary aluminum: prices for both bauxite and alumina have increased by less than 20 percent since January 2000. In contrast, the price of iron ore is more than 600 percent higher today (it was more than 900 percent higher at the postcrisis peak in late 2011), and the price of metallurgical coal is about 250 percent higher.

To reignite the value creation engine and restore investor confidence, aluminum industry CEOs and their management teams must develop and implement compelling action plans that will turn around the industry. Executives need a deep understanding of what caused the aluminum industry’s crisis in order to develop a meaningful and deployable CEO agenda that addresses current challenges and captures new opportunities. These are the key questions:

• Why did aluminum miss the commodity super cycle?
• Is the industry’s crisis temporary, or does it reflect a long-term structural change?
• To guide future actions, what could aluminum companies have done differently in recent years to avoid or mitigate the industry’s performance issues?
• What strategies will be most effective to get the aluminum industry back on track?
• What specific actions should aluminum executives push forward in their companies?

Below we answer these questions and propose specific actions that aluminum executives can take—providing an aluminum industry CEO agenda for 2013 to 2015. By understanding What Caused the Aluminum Industry’s Crisis? and taking the right actions to respond, aluminum industry executives have an opportunity to change their luck with element number 13.