Alcoa’s Split Teaches Valuable Lessons about Aluminum, Life… and Luck

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Success is not just about skills and hard work, it’s also about being in the right place at the right time. That’s especially true in the commodity business. Let’s look at an example.

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From 1995 until 2000, stock market indexes rose in the range of 200-500%. If you happened to be a fund manager during those years (being in the right place at the right time) you probably made a killing, regardless of how good of a manager you were. In contrast, if you ran that same fund over the next three years, in which stock indexes fell in the range of 40-75%, then investors would probably think you are a terrible manager.

The same thing applies to real state agents that happened to be there during the housing boom or to the NBA head coach, Phil Jackson, who took the helm of the Chicago Bulls when Michael Jordan delivered the franchise its best years… and then took over the Los Angeles Lakers when Kobe Bryant and Shaquille O’Neal rejuvenated that franchise. Not to take credit away from any of these individuals, but they didn’t have that difficult of a time delivering what was expected from them.

In the same manner, there are brilliant people out there that didn’t have the same luck. They just happened to be in the wrong place at the wrong time. Which, brings us the case of Arconic‘s Chief Executive Officer, Klaus Kleinfeld.

Bad Timing In the Commodity Business

Kleinfeld was appointed CEO of Alcoa, Inc. in May 2008, just when aluminum prices were trading at their decade’s peak. Kleinfeld’s timing to take the helm at Alcoa couldn’t have been worse. Just a couple of months later, aluminum prices collapsed from $3,000 to $1,300 per metric ton. Shares of the company lost near 70% and the stock was kicked out of the Dow Jones Industrial Average after its slump. At the time, Kleinfeld must had felt like the rug was pulled out from under what should have been his greatest success. Wrong place, wrong time.

For the next two years, aluminum recovered some of its losses but prices never got close to their 2008 peak. If that wasn’t bad luck enough, then there was Kleinfeld’s experience in 2011. Aluminum prices peaked in the spring of 2011 and from than point until January 2016 last year they only moved south.

This bad performance of aluminum prices explains why during those years Kleinfeld implemented a transformation strategy to reduce the company’s reliance on commodities, transforming it into a global leader in lightweight metals and increasing its reputation for manufacturing innovation. To me, that seems like a reasonable strategy to take.

Also reasonable was the decision to split the company in two different businesses, a move meant to buffer its growing parts business from commodity swings. Kleinfeld picked the the value-add company, Arconic, which inherited the old Alcoa, Inc.’s automotive and aerospace businesses which were free of the price swings that plagued Alcoa as a commodity aluminum business.

The timing of this move could not have been worse. Just as the company split and Kleinfeld became chairman and CEO of the downstream business, aluminum prices started to recover. Since the company split in October 2016, Alcoa’s shares have gone up near 80% thanks to higher aluminum prices. Meanwhile, shares of Arconic have stalled. With no exposure to increasing commodity aluminum prices, where could those shares go?

Arconic’s investors lost a great opportunity to make big profits over the past few months. As a result, Several of Arconic Inc.’s biggest shareholders are pressing the company to oust its Chief Executive. Klaus Kleinfeld has done it again: Wrong place, wrong time.

Lessons To Be Learned

I think there are two big lessons to be learned from this story:

  • Luck is a determining factor in our lives: Whether you like it or not, the results of your actions don’t only depend on whether your choices are good or bad, they also depend on luck.
  • Long-term forecasting is a game of fools: Klaus Kleinfeld probably has a good team running running his aluminum price projections and had lots of great advice about why it was better to stick with Arconic than the new Alcoa, Corp. Despite that… they got it all wrong. Long-term price projections can be fundamentally wrong and can’t be trusted. Too many things can change within a few years’ time. In the commodity business, it’s necessary to take markets day-by-day and make decisions based on the most relevant current information, instead of relying on long-term price projections.

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