Recasting Alcoa

A brutal drop in aluminum prices required an equally brutal remake of the company

By Kathleen Kingsbury / Quebec Monday, Nov. 08, 2010
    • Photograph by Eamon MacMahon for TIME

    On the line Removing old anodes, caked with cryolite, at the Deschambault smelter

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    Besides China, Alcoa is up against U.K.-based Rio Tinto and the Russian outfit UC Rusal, plus a handful of start-ups. Alcoa may have the oldest smelters and the highest costs, yet it still dominates the North American market. "Alcoa is the 800-pound gorilla in this industry," Beristain says. "They need to take this opportunity, which may be short-lived, to do more picking and choosing." Indeed, many of Alcoa's recent investments appear to favor upstream, lower-cost operations. It has closed or sold many of its noncore assets in the past year, like its packaging business.

    Kleinfeld has always maintained that cuts alone aren't the answer. In 2007 the firm opened its first new primary-aluminum facility in 20 years, in eastern Iceland, where inexpensive and renewable hydroelectric power can meet 100% of its energy needs. Finishing touches are being put on a $1.2 billion bauxite mine and rail system in Brazil to expand operations there. By 2014, Alcoa hopes to complete a $10.8 billion aluminum complex at Ras Az Zawr in Saudi Arabia, a joint venture that should be one of the lowest-cost facilities in the world.

    Coming up with the cash to finance these much needed projects wasn't simple. Beyond cost cutting, Alcoa last year issued an oversubscribed equity offering that grossed $1.4 billion. "The timing was terrible, and they had to issue it at a very unfavorable price," Bradford says. "But it was the right thing to do."

    Making hard choices paid off in $61 million in profit for the year's third quarter. Profit per share, before special charges, handily beat expectations, and the company raised its outlook for aluminum demand. Still, it will take more than a couple of good quarters to boost Wall Street's confidence again. Alcoa's stock price dropped from $43 in 2008 to a low of $5.22 in March 2009. It continues to be one of the worst-performing components of the Dow Jones industrial average, off about 20% this year alone. "Investors remain skeptical about aluminum fundamentals," Morgan Stanley analyst Mark Liinamaa wrote in an April research note.

    One reason is that Alcoa can't repeat its cost savings: it has eliminated more than 48,000 jobs since 2007 — nearly half its workforce. Some employees, including those at Deschambault, have accepted pay cuts of up to 15% and reduced hours to stop further layoffs.

    Trimming jobs can boost short-term profits, for sure, but some argue that the plan could create long-term damage. "Extreme downsizers lose know-how and employee loyalty, and ultimately their earnings tend to lag behind their competitors'," says Wayne Cascio, a management professor at the University of Colorado in Denver. "You simply can't shrink your way to prosperity."

    In July the firm's chief financial officer, Charles McLane, made headlines when he suggested Alcoa intends to rehire few if any of those laid off. Kleinfeld took a more nuanced line when speaking to TIME recently. "Rehiring will begin once there is substantial growth," he said. "But we can't afford to go back on productivity."

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