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Can Alcoa Continue Its Good Run in 4Q17?

PART:
1 2 3 4 5 6 7 8
Part 7
Can Alcoa Continue Its Good Run in 4Q17? PART 7 OF 8

Why Should Aluminum Have All the Fun? Alumina Joins the Party

Alumina

Looking at aluminum’s production process, bauxite is refined to alumina. Then, the alumina is processed into aluminum. Historically, alumina has been priced as a percentage of aluminum prices. In the last few years, buyers and sellers have been turning to the alumina price index.

Why Should Aluminum Have All the Fun? Alumina Joins the Party

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Generally, aluminum prices are volatile because they’re traded on exchanges. Sentiments tend to influence day-to-day price movements. In the past, the alumina price index wasn’t as volatile. It’s decided between buyers and sellers. The index shows the dynamics of the physical market—unlike aluminum where sentimental factors can be short-term price drivers.

Multiyear highs

Talking about the alumina price index, prices were stable in June and July around the $300 per metric ton level. We saw an uptrend in alumina prices last month. Since the aluminum markets have been strong, alumina also seems to have joined the party.

According to Platts, the alumina price index hit multiyear highs earlier this month. The rising alumina price index is positive for companies like Alcoa (AA) and Norsk Hydro (NHYDY) since they’re long alumina. These companies produce alumina for their internal needs and sell alumina to outside parties. Century Aluminum (CENX) is short alumina. It buys all of its alumina requirements from third parties (RIO) (XME).

It’s worth noting that in 2Q17, the higher alumina price index and an increase in other raw material costs dented Century Aluminum’s profitability. The company missed consensus earnings estimates. If the alumina price index continues to quote at higher price levels, it could have a negative impact on Century Aluminum’s earnings in the coming quarters.

In the next part, we’ll see how physical aluminum premiums look in September.

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