Why Alcoa’s profits more than doubled in the primary segment



Alcoa’s profits soar in the primary segment

In the last part of the series, we discussed the alumina segment’s performance. Another segment in Alcoa’s (AA) upstream operations is the primary metals segment. This segment produces primary aluminum. Most of the primary aluminum that Alcoa produces is sold to outside parties. In this part of the series, we’ll analyze the primary segment’s third quarter performance.

primary segments

Higher aluminum prices led to an increase in profits

The previous chart shows the primary segment’s performance in the third quarter. As you can see, the profits more than doubled over 2Q14. The increase in profits was mainly due to higher aluminum prices. In the third quarter, aluminum selling prices increased by almost 10%—compared to 2Q14.

In contrast, the segment’s production actually decreased over the second quarter. This is because two production facilities closed. We discussed these facilities in Part 3 in this series. Now, we’ll look at the segment’s other key highlights.

Key highlights

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The previous chart shows the performance bridge between the second and third quarter results. As you can see. the increased profits are attributed to two factors. One set of factors is market-based. The remaining factors are due to Alcoa’s superior performance. The market factors include the aluminum price increase and the positive impact of currency fluctuation.

Almost half of the incremental profits came from Alcoa’s superior performance. This was mainly due to a better price mix and cost controls. While Alcoa has little control over the market-based factors, the superior performance is mainly due to actions by Alcoa’s management.

In the next part of the series, we’ll look at the global rolled segment’s performance. This segment also delivered solid results for Alcoa.

Alcoa forms little over 3% of the SPDR S&P Metals and Mining ETF (XME). It’s the first major metal company to report its results. Alcoa is the market leader in the U.S. Investors in other aluminum plays—like Rio Tinto (RIO), Century Aluminum (CENX), and Constellium (CSTM)—should also keep a close eye on Alcoa’s results.


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