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Cost Pressures and Lower Premiums Hit Alcoa’s 1Q 2015 Earnings

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Global rolled products

Previously in this series, we learned how strong demand from the aerospace sector boosted Alcoa’s (AA) downstream revenues in 1Q 2015. Now, we’ll analyze the 1Q performance of its GRP (global rolled products) segment. This segment supplies rolled products to the automotive, aerospace, and packaging industries. The GRP segment after-tax operating income dropped by more than half compared to 4Q 2014.

Currently, Alcoa forms 3.5% of the SPDR S&P Metals and Mining ETF (XME). Century Aluminum (CENX) and Allegheny Technologies (ATI) respectively form 2.5% and 3.9% of XME.

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Lower premiums

The previous chart shows the Alcoa GRP segment 1Q financial performance. As you can see, income has dropped substantially from the previous quarter. Despite record auto sheet shipments and productivity gains, the after-tax operating income has dropped ~42% year-over-year, or YOY. This segment was negatively impacted by the fall in physical aluminum premiums.

Cost pressures

Alcoa faced cost pressures in its packaging segment. Crown Holdings (CCK) is among the leading manufacturers of packaging products.

Alcoa also faced higher operating costs, as it ramped up production at its Saudi Arabia rolling mill. Higher research and development expenses for the new Micromill technology also dragged down its 1Q earnings.

Alcoa expects the after-tax operating GRP segment income to fall by 30% in 2Q 2015, YOY. It faces challenges in passing aluminum premiums on to its buyers in Russia. Aluminum prices have corrected over the last few months. However, the GRP segment still holds some high-cost inventories. Alcoa expects its 2Q earnings to be off by $15 million because it will offload higher-cost inventories first.

Alcoa took several portfolio actions in its upstream business. How have these impacted its 1Q earnings? We’ll find out in the next part on our series.

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