Metal-heavy technologies, such as data centers and electric vehicles, have created a boom for the U.S. aluminum industry. In fact, aluminum prices are climbing because nearly everything inside a data center relies heavily on the metal. Nevertheless, aluminum producers like Alcoa (AA) face a serious challenge: data centers use enormous amounts of electricity, and power prices are rising quickly. Therefore, Bank of America (BAC) expects U.S. electricity demand to grow five to ten times faster over the next decade, thereby making it harder for aluminum smelters to stay profitable since they require cheap, stable power.
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More specifically, smelters use around 14 megawatt-hours of electricity per ton of metal, which is enough to power a home for nearly 18 months. A new smelter would need as much electricity as a city the size of Boston or Nashville. To operate profitably, smelters need long-term power contracts priced at $30–$40 per megawatt-hour. However, companies like Amazon (AMZN) and Microsoft (MSFT) are paying more than $100 per megawatt-hour to power data centers, pushing smelters out of the market.
As a result, the U.S. now has only six smelting sites left, with just four that are actively running. What’s more is that even at full capacity, they could meet only one-third of domestic demand. As a result, industry groups say that rebuilding America’s aluminum supply requires at least $25 billion, five new smelters, and government support, especially as tensions with China grow. And while projects like a new Oklahoma smelter are in the works, analysts warn that securing affordable power remains the industry’s biggest obstacle.
Is Alcoa Stock a Good Buy?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on AA stock based on eight Buys, three Holds, and one Sell assigned in the past three months, as indicated by the graphic below. Furthermore, the average AA price target of $384 per share implies 17% upside potential.
