Kaiser Aluminum Corporation, known for its high-value specialty aluminum products, is undergoing a strategic shift with major implications for the aluminum industry and the company's profitability. While analysts focus on Kaiser's aerospace performance and capacity expansion, a subtle but significant change in the company's metal sourcing strategy is flying under the radar.

During the Q1 2024 earnings call, CEO Keith Harvey revealed a new metal input strategy at their Warrick packaging facility. Driven by environmental concerns and customer demand for recycled content, the strategy involves a transition from prime aluminum sourced from the adjacent Alcoa smelter to a higher mix of used beverage cans (UBCs) and recycled scrap.

This seemingly simple change could unlock substantial margin improvements. Harvey estimates that the revised metal sourcing strategy will deliver a consolidated margin improvement of 150 to 200 basis points annually. This is a massive leap, particularly for a company operating in a historically cyclical and margin-constrained industry.

Why the Shift to Scrap?

"Financial Benefits: Recycled aluminum requires significantly less energy to produce than primary aluminum, making it more cost-effective, especially amid volatile energy prices. Sustainability: The increased use of scrap aligns with the global focus on sustainability and the circular economy. Customer Demand: Customers, especially in food packaging, are demanding products with a lower carbon footprint and higher recycled content."

Potential Impact on Kaiser's Bottom Line

A 175 basis point improvement (midpoint of Harvey's estimate) on their 2023 adjusted EBITDA margin of 14.3% would translate to a new margin of 16.05%. Based on their 2023 conversion revenue of $1.47 billion, this margin improvement could translate to an additional $25.8 million in adjusted EBITDA.

Potential Ripple Effect on the Aluminum Industry

If Kaiser's success inspires a wider industry shift towards scrap, the current oversupply of primary aluminum could decrease, potentially leading to higher primary aluminum prices. This, in turn, could further enhance the profitability of Kaiser's existing production, creating a virtuous cycle of margin expansion.

Projected EBITDA Margin Improvement

Kaiser's strategic shift towards scrap is a bold move. The success of this strategy hinges on securing a stable and reliable supply of scrap metal. However, the potential rewards are significant, not just for Kaiser, but for the entire aluminum industry. As the company moves towards the completion of its roll coat investment and the launch of its Phase VII expansion, the quiet revolution brewing in its metal sourcing strategy could be the catalyst for a profound and lasting transformation.

"Market Cap: $1.54 billion (as of April 25, 2024) [Source: Seeking Alpha] Conversion Revenue Growth: 2% to 3% projected for 2024 [Source: Q1 2024 Earnings Call] EBITDA Margin Improvement: 70 to 170 basis points projected for 2024 [Source: Q1 2024 Earnings Call]"

"Fun Fact: Aluminum is infinitely recyclable without any loss of quality. Recycling aluminum requires only about 5% of the energy needed to produce it from raw materials. [Source: The Aluminum Association]"