Should Lower Alumina Prices Bother Alcoa and Other Producers?
Although lower alumina prices might not immediately lead to a decline in aluminum prices, they certainly could limit aluminum’s upside.
If Chinese aluminum demand surprises on the downside, we could see aluminum markets in a surplus this year.
China’s aluminum demand is expected to be strong this year. Alcoa raised its 2017 global aluminum demand forecast to 4.5%–5.0% from its previous guidance.
China produced ~2.76 million metric tons of aluminum in April—a YoY increase of 7.6%. Its production has risen 12.0% YoY in the first four months of 2017.
Aluminum has outperformed both copper and zinc in 2017—it has built on last year’s gains. As of May 23, aluminum has risen ~14.0% this year.
Alcoa reached a closing high of $38.54 on February 14 before it saw selling pressure. The slide in its stock coincided with Arconic’s stake sale in Alcoa.
Alcoa (AA) closed at $31.63 on May 17, losing 1.7% from its previous day’s close.
Aluminum prices are the key driver of aluminum producers’ earnings.
According to consensus earnings estimates compiled by Thomson Reuters, analysts expect Alcoa to deliver EBITDA of ~$2.0 billion this year.
Weak sentiment in physical aluminum markets could be a reason behind the divergence between Alcoa (AA) and aluminum prices.
Earnings of aluminum producers such as Alcoa are sensitive to alumina and aluminum prices.
During its 1Q17 earnings call, Alcoa (AA) raised its 2017 global aluminum demand forecast to 4.5%–5.0% from its previous guidance of 4.0%.
LME (London Metal Exchange) aluminum inventory is at a nine-year low, which strengthens the bulls’ perspective.
Alcoa and Century Aluminum (CENX) survives the commodity price slump by closing their high-cost capacities and negotiating better power deals for several operating plants.
If the US decides to impose a blanket import tax on aluminum imports, we could see a decoupling of COMEX aluminum prices from LME prices. US aluminum prices could edge up to reflect the import tax.
Goldman Sachs (GS) held a bearish view of base metals until about six months ago. In 1Q16, Goldman Sachs said that it expects aluminum prices to fall to $1,350 per metric ton.
According to consensus estimates compiled by Thomson Reuters, Alcoa (AA) has a mean one-year price target of $42.44, representing a 25.8% upside over its closing price on April 28, 2017.
Recently, Alcoa (AA) stock has seen heightened volatility. In this series, we’ll look at the impact of the Trump administration’s investigation into aluminum imports, as well as Alcoa’s bearish and bullish drivers.
Arconic (ARNC) released its 1Q17 earnings on April 25. The company was listed as a separate entity on November 1, 2016, when Alcoa split into two new entities.
Century Aluminum (CENX) was among the best-performing aluminum stocks (NHYDY) (ACH) (SOUHY) last year with gains of 94%.