Can New Alcoa Add Up? Investors Have Doubts

For most of its 127 years, Alcoa Inc. has done two things: it’s made aluminum, and it’s made stuff out of aluminum.

Now Klaus Kleinfeld wants to change that with a bold -- and potentially risky -- plan to cleave the aluminum giant in two.

A symbol of American industrial might through the 20th Century, Alcoa said Monday that it would separate its shrinking, legacy aluminum business from its growing downstream operations, which focus on making products for industries including autos and aerospace.

Whether dividing Alcoa into separate companies will pay off is far from certain. Kleinfeld, the chief executive, wants to decouple the highly-engineered lines from legacy operations that have been hurt by the collapse in world commodities prices.

That risks alienating investors who sought diversification: the industrial side of the business has offset unreliable cash flows from the commodity side in the current downturn. While Alcoa’s shares rose 5.7 percent Monday, its bonds tumbled.

And while hiving off smelters might seem smart now when commodity prices are so low, prices will rebound in years ahead once demand all-but-inevitably picks up enough to match output.

“The commodity business will be worth a lot more than it is today at some point in the future,” Lloyd O’Carroll, a Richmond, Virginia-based analyst at CRU Group, said in an interview Monday. “It is a viable business, a competitive business and a highly cyclical business.”

One thing is certain: aluminum producers are hurting right now. Led by mills in China, the industry has been churning out so much aluminum that the world has been awash with it for a decade. Profits are scarce: about half of all production is losing money at current prices, according to Macquarie Group Ltd.

For Kleinfeld, the split marks the culmination of a strategy he pursued since taking the reins in 2008: relentlessly emphasizing value-added products while rationalizing a commodity business that was once the world’s largest by volume. As CEO of the new manufacturing company, he can ease off his promotion of the "miracle metal."

“Aluminum will still play a very, very important role, but we have become this multi-material lightweight metal specialist,” Kleinfeld said in an interview. “That has been our success story.”