Alcoa's Venture With Ma'aden: Long-Term Benefits In 2013

Ma'aden is a Saudi mining company that is 50% owned by the Saudi government. It was originally formed to facilitate and develop minerals in Saudi Arabia. Back in 2009 Alcao (AA) and Ma'aden signed an agreement to build a $10 billion aluminum complex. This joint venture was situated to have the smelter up and running by 2013 and the refinery by 2014. The product mix for the plant has already begun.

Three different product lines will be developed here: Automotive heat-treated and non-heat-treated sheets; building and construction sheets; and foil stock sheets.

As we get closer to the opening of both these operations, there are a number of benefits for Alcoa. It takes three times the energy to produce aluminum as it does steel. This complex in Saudi Arabia is designed to lower energy costs and improve Alcoa's margins. When a company can lower the costs of generating revenue, it increases its net profits.

Not only will this be the most advanced, efficient, and low cost aluminum complex in the world, but the fully developed infrastructure will also utilize low-coast natural gas power. Thus, Alcoa will have a strong foothold in a developing region of the world. Ms. Jacynthe Cote, CEO of Rio Tinto Alcan was quoted stating: "The Middle East is well on its way to becoming the world's leading primary aluminum producer." Alcoa will be a major player in this region.

The benefits for Alcoa will not be seen right away as 2012 is a turn around year for aluminum. We do see a slow turn around in the economy and slight increase in demand of aluminum products.

Midwest spot aluminum prices have risen.

U.S. Warehouse prices for aluminum are up.

Aluminum alloy prices are steady.

The aluminum billet markets are steady and strong.

Aluminum scrap prices are rising with automobile demand.

These are signs that the economy is turning around. But it will take longer for the full benefits of price increases to take hold. Just earlier this year, one of Alcoa's manufacturing plants in Blount County (New York) posted its first quarterly loss in over a year as aluminum prices dropped 12%. Analysts expect Alcoa to report adjusted losses for the first quarter of 2012 as prices and demand slowly rise.

There is still a glut of aluminum on the market but the demand for aluminum should rise as the overall economy improves. In particular, its light weight makes it attractive to the automobile and aerospace industries: lighter vehicles lead to fuel efficiencies. Alcoa is making very smart business moves to position itself for the future. Once 2013-14 roll around and the new plant in Saudi Arabia kicks off, the company will be producing aluminum for less money than it ever has in the past.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.