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Alcoa looks for other ways to raise cash, CEO tells shareholders

| Friday, May 3, 2013, 4:33 p.m.

Faced with a glut of aluminum and low prices, Alcoa Inc.'s only alternative was to find other ways to raise cash, CEO Klaus Kleinfeld said.

“What we have decided to do is concentrate on things we have under our own control,” Kleinfeld said on Friday at the company's annual meeting in the Fairmont Hotel, Downtown.

Alcoa is restructuring its portfolio of businesses to focus on products that have better profit margins instead of volume production of the world's most abundant metal.

“We have really changed the portfolio dramatically,” he said.

Nearly a billion dollars in profit has disappeared as the price has fallen 33 percent, from a high of $2,797 on May 3, 2011, on the London Metal Exchange, the international market that sets metals prices. It traded at $1,875 a metric ton on Friday.

The pricing “environment hasn't treated us too well,” Kleinfeld said.

Driving the shift was $13.2 billion in revenue last year to so-called “value-added” products with higher profit margins, ranging from beverage cans to aircraft parts. One third of that came from the aerospace industry, and future opportunities are growing because the world's two largest aircraft manufacturers, Boeing and Airbus, have eight years of orders on their books.

“We are very well positioned not only on metal planes but also on composite planes,” Kleinfeld said.

Composite materials make up 50 percent of Boeing's 787 Dreamliner, including fuselage and wings. But the 787 also is 20 percent aluminum, 15 percent titanium and 10 percent steel. Suppliers such as Alcoa, U.S. Steel Corp. and Allegheny Technologies Inc. hope production of 787s reaches 10 a month by the end of this year.

On other aircraft, “Alcoa blue flies from nose to tail,” Kleinfeld said as he displayed a graphic of a Boeing 737, showing aluminum parts Alcoa supplies or hopes to supply. So far this year, Boeing has received 203 orders for 737 models, by far the most of its aircraft lineup.

Kleinfeld also expects the automotive industry to provide a boost.

“We're seeing automotive aluminize,” he said, with aluminum sheet used in each vehicle projected to grow by 30 percent to 35 percent by 2015.

On Thursday, Alcoa said it will spend $275 million to expand sheet production at its Alcoa, Tenn., plant. Last year, it announced a $300 million expansion at a plant in Davenport, Iowa.

As automakers work to meet higher mileage requirements, “we are gearing up to take advantage of opportunities.”

Despite Alcoa's efforts, the price “overrides everything else positive that's going on in the company,” he said.

Alcoa's stock price has been stuck below $10 a share for more than a year, closing on Friday at $8.62, up 16 cents. It traded as high as $18 a share in early 2011, when aluminum prices were high.

“That's a frustration everyone in this room has felt,” Kleinfeld said.

Even with the focus on value-added products, Alcoa is working to improve the performance of its primary aluminum operations worldwide.

On Wednesday, it announced a 15-month review that will look at idling or closing more smelting plants to cut costs. It has idled about 13 percent of its smelting capacity, and the review could affect another 11 percent.

“You've got to be the lowest-cost producer,” Kleinfeld said.

To that end, Alcoa is building a low-cost, integrated aluminum plant in Saudi Arabia that will have 780,000 metric tons of smelting capacity in a joint venture with Saudi Arabian Mining Co., a state-controlled company also known as Ma'aden.

Alcoa's goal is to reduce aluminum production costs by 10 percentage points by 2015, and “this project alone will move us 2 percent down the cost curve,” Kleinfeld said.

The CEO answered a shareholder's question on whether moving Alcoa's headquarters back to Pittsburgh would help cut costs.

“There is this myth here in Pittsburgh (that) we have a large headquarters in New York,” he said. “Let me clarify, once and forever hopefully, because we've got to get this behind us, because I don't feel it's a discussion internally anymore.

“We have probably about 70 people in the headquarters in New York. So it's a very small office ... and we have about (2,000) people here in Pittsburgh. ... I understand there is some emotion around it, but the fact is that being headquartered in New York gives quite a number of advantages that are more than justified on the cost side.”

One is attracting executive talent, where New York has advantages, he said.

Another is that logistics in Pittsburgh “unfortunately have not massively improved; in fact, they have decreased. It's quite painful sometimes to figure out logistics from Pittsburgh. We're working on it with the logistics providers.”

John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or joravecz@tribweb.com.

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