Alcoa Inc. (AA - Free Alcoa Stock Report), the aluminum producer and Dow-30 component, has reported 2012 fourth-quarter results. Sales of $5.90 billion beat our $5.62 billion estimate, as healthy conditions downstream compensated for softness elsewhere. (The top line came in at $5.99 billion in the prior-year period.) In particular, firmness in automotive, aerospace, and commercial transportation end markets buoyed the Global Rolled Products and Engineered Products and Solutions segments. Alcoa stock was flat following the report.

Concurrently, operating efficiencies benefited from cost-cutting measures implemented throughout 2012 ($1.3 billion in savings). Taking these factors together, the company met our share-earnings estimate of $0.06, compared with a loss of $0.03 in the year-earlier term. However, investors should be cognizant of the fact that management had previously lowered expectations for the period.

Aluminum prices regained some ground as the December quarter came to an end, closing the year at $2,045 per ton on the London Metal Exchange. By comparison, the metal averaged $1,950 per ton during the third quarter. A major catalyst for this rebound was rising economic activity in China, the largest aluminum consumer, where demand is likely to forge ahead by more than 10% in 2013, to 20 million-25 million tons. Thanks in part to stimulus spending in that nation, investments in industries requiring the metal (transportation and durable goods) should expand materially. Globally, the aerospace industry appears set to resume its voracious appetite for aluminum alloys, as record backlogs necessitate greater production levels.

After falling for three consecutive years (13% in 2010, 10% in 2011, and 6% in 2012), management is looking for global aluminum consumption to rise 7% in 2013. This is ahead of the 6.5% rate required to meet Alcoa's forecast of a doubling in aluminum consumption between 2010 and 2020.

The recent uptick in aluminum demand appears to be driven, in part, by speculative investors. Indeed, production of the alloy exceeded industrial demand by 1.4 million tons in 2012, with the imbalance apt to approximate 1.5 million tons this year. Warehouses for the London Metal Exchange are flush with the metal, presently holding more than 5.0 million tons, and total global stockpiles may well reach 10 million tons in 2013. Producers are selling greater quantities of aluminum to financial institutions, or are using the metal as collateral for loans. Aluminum financing became more prevalent during the 2007-2009 recession, as dwindling physical demand encouraged producers to seek alternate means to raise capital. Essentially, such transactions reduce the availability of the alloy in the market.

Improvement in aluminum markets and the recent closure of older inefficient smelters positions the company to experience year-over-year top- and bottom-line recoveries in 2013, with the measures likely reaching $25.0 billion and $0.75 a share, respectively. Alcoa's transition towards greater efficiency is exemplified by the recent shutdown of a plant in Portovesme, Italy and the subsequent start-up of operations at Ras Al Khair in Saudi Arabia. Under this $10.8 billion joint venture with Saudi Arabian Mining Company, Alcoa gains access to that country's cheap energy.

Over the 3- to 5-year investment horizon, Alcoa stock offers wide price-recovery potential. Indeed, the company's long-term prospects will largely hinge on aluminum demand from the auto manufacturing sector, since carmakers remain under pressure to build lighter, more fuel-efficient vehicles without sacrificing passenger safety. The alloys high strength-to-weight ratio should help boost its usage in the commercial aerospace realm.

About The Company:Alcoa Inc., a Pennsylvania corporation, is a global leader in the production and management of primary aluminum, fabricated aluminum, and alumina combined. It supplies the aerospace, automotive, building and construction, commercial transportation, and industrial markets.  It has more than 300 operating and sales locations in over 30 countries. Sales of aluminum and alumina account for more than three-fourths of Alcoa’s total revenues. It also produces nonaluminum products, such as precision castings and fasteners for the aerospace and industrial markets. Alcoa’s operations consist of four worldwide reportable segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions.

At the time of this writing, the author did not have positions in any of the companies mentioned.