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Alcoa Sees Biggest Gains from Alumina Segment in 1Q 2015

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Apr. 15 2015, Updated 10:17 a.m. ET

Alumina segment

In 1Q 2015, Alcoa’s (AA) alumina segment contributed $221 million or 35% of the company’s after-tax operating income. This makes the alumina segment the biggest contributor to Alcoa’s 1Q earnings.

Almost two-thirds of Alcoa’s alumina shipments are to third parties, while the remainder are used by its primary metals segment.

Vale (VALE) and Rio Tinto (RIO) are the other major alumina producers.

Alcoa currently forms 2.65% of the Materials Select Sector SPDR ETF (XLB). Allegheny Technologies (ATI) forms 0.57% of XLB.

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Earnings increase

The previous chart shows the Alcoa alumina segment 1Q financial performance. As you can see, while the shipments have come down on a year-over-year, or YOY, basis, the after-tax operating income has more than doubled over this period. Alcoa’s transformation strategy is one reason for this. The company has curtailed its high-cost operations over the last few quarters.

Alcoa’s average selling price for third-party shipments shows a YOY increase of 10%. To price alumina, companies either use the API (alumina price index) or price it as a percentage of the prevailing aluminum price. Alcoa has been moving away from aluminum-based pricing for alumina. It now prices ~75% of its alumina based on the API. Moving to the API pricing mechanism frees the fundamentals of its alumina business from the volatility of aluminum prices.

Strong dollar

Alcoa’s alumina segment benefits from a stronger US dollar (UUP). Alcoa’s alumina refineries are mainly located in Europe and Australia. In 1Q, the alumina segment gained $37 million from the impact of currency movements. Lower energy prices also contributed $19 million to this segment’s 1Q after-tax operating income.

Alcoa’s primary metals segment earnings were negatively impacted by lower aluminum prices. We’ll discuss this in detail in the next part of our series.

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