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Trouble Ahead For Alcoa? Halcyon Days Of 2014 Could Be Over

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Aluminum prices

Aluminum prices were strong for most of 2014. Prices rebounded well after hitting a four-year low earlier this year. Aluminum plays including Alcoa (AA) and Century Aluminum (CENX) posted strong earnings in 2014 thanks to higher aluminum prices. Other primary producers including Rio Tinto (RIO) and BHP Billiton (BHP) are also affected by the movement in aluminum prices.

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Aluminum prices fall

Spot aluminum prices are up by ~5% in 2014 on a year-over-year basis. However, aluminum prices fell toward the latter half of 2014.

Alcoa estimates that it loses $240 million in annual profits for every $100 fall in the price of aluminum. Aluminum prices corrected by ~$250 per metric tonne in last couple of months, which may have a negative impact on Alcoa’s 2015 earnings.

Most of the decline in aluminum prices came after the fall meeting of OPEC (Organization of Petroleum Exporting Countries). OPEC decided against reducing crude output at that meeting. Crude oil prices have fallen sharply since then.

Currently, Alcoa is a part of the SPDR S&P Metals and Mining ETF (XME).

Aluminum premiums

Aluminum buyers have to pay a physical premium along with the prevailing aluminum price on the London Metal Exchange. Aluminum prices rose considerably in 2014, and Alcoa benefited from rising premiums. Meanwhile, certain factors could affect premiums in 2015, as we’ll learn in our next part.

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