Alcoa Was Smart to Value-Add Titanium Fabricator RTI Metals, Inc.

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You cannot accuse the folks at Alcoa of not understanding their market or of lacking a strategic plan.

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Investors would always like a better performance but in the midst of one of the most tumultuous periods in the history of the non-ferrous metals markets the firm has seen the writing on the wall and positioned themselves to take advantage of changes in their marketplace while minimizing the damage from market turmoil.

Titanium Maximum

Alcoa’s latest move, as reported earlier in MetalMiner, to acquire, Pittsburgh-based RTI International Metals Inc., in a $1.5 billion stock for stock deal is a logical and sound strategic move, building on the aluminum producer’s long-term plan to invest in downstream, value-added activities and gradually move away from the lower-return primary smelting business. Alcoa has invested heavily in new production facilities to meet an inexorable rise in demand for automotive sheet and to capitalize on it’s position as a major player in the equally buoyant aerospace sector.

The purchase of the  titanium specialist RTI Metals, with its focus on exactly the same markets but in the complimentary product area, will support Alcoa’s existing activities and allow it to grow its sales book with major automotive and aerospace firms.

The WSJ reported that RTI has revenue of around $800 million a year, while its aerospace and defense operations delivered 80% of its revenue in 2014, making parts such as landing gears, engines and airframes. Other markets include medical devices and pipes and tubes for the oil and gas industries.

Smelting Takes a Backseat

Meanwhile, a report in Reuters this week illustrates Alcoa’s continued reduction in its smelting activities. The firm announced it may reduce up to 14% or half a million tons of capacity in the face of weak prices. Contrary to primary producers strident assertions that they were not beneficiaries of record physical delivery premiums, Alcoa’s continued retrenchment from the primary end of the market as premiums show the first signs of weakness in two years suggests they can see the writing on the wall and are getting out whilst they stand a chance of finding a buyer for those plants that may be deemed viable.

If not, they will just close the plants down the firm says as Reuters speculates its highest cost plants in Brazil and Spain will be the first to go. The overall trend, though, should not be seen as a wholesale departure from primary smelting. Alcoa remains the world’s second-largest primary producer and while it has closed capacity in North America and Europe it has opened substantial new low-cost capacity in the Middle East, taking advantage of low-cost natural gas-based power generation.

RTI should bring much more than a bolt-on $800 million of revenue. The firm’s expertise in the same industries as Alcoa should strengthen the joint business’ expertise and strategic partnership with major end users. Nor is it likely to be the end of Alcoa’s migration towards a business with a more value-add focus.

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