Why aluminum prices impact Alcoa’s profits


Nov. 20 2020, Updated 5:29 p.m. ET

Aluminum prices impact Alcoa’s profits

Aluminum prices are a key driver for aluminum companies. Aluminum prices directly impact their profits. Aluminum prices have been volatile this year. Aluminum prices touched their four-year low in 2014. However, the prices rebounded sharply and reached ~$2,100 per ton.

In September, spot aluminum prices fell by ~8%. At Alcoa, for every fall of $100 per metric ton in aluminum prices, its profits declined by $240 million.

Aluminum price dynamics

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The dynamics of aluminum prices are different from other metals like steel. Last year, aluminum was the most widely traded metal on the London Metal Exchange (or LME). Along with actual aluminum end consumers, there’s a lot of financial demand for aluminum. This financial demand helps a lot of investors and arbitrageurs make money. However, aluminum end consumers are negatively impacted.

Rising premiums

Another factor that helped aluminum companies’ profits—like Alcoa (AA), Kaiser Aluminum (KALU), Century Aluminum (CENX), and Rio Tinto (RIO)—has been the rising premiums for taking physical delivery of aluminum. For aluminum buyers, this premium is added to the prevailing aluminum prices on the LME. This increases the input costs for aluminum buyers.

This has led to litigations from aluminum consumers. One of the litigations is filed in a U.S. court. The second one is under consideration in a court in the United Kingdom. This is a potential risk for Alcoa and other aluminum producers. We’ll discuss this in the next part of the series.

Investors can consider the SPDR S&P Metals and Mining ETF (XME) to get exposure to the metal industry.


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