Why Earnings Sensitivity Varies among Aluminum Producers



Earnings sensitivity

Primary aluminum producers’ earnings are sensitive to aluminum prices. This sensitivity depends, among other things, on the percentage of primary aluminum in their product portfolio. Rio Tinto’s (RIO) Aluminum segment gets most of its revenue from selling commodity-type products like bauxite, alumina, and aluminum.

In 2Q15, Norsk Hydro (NHYDY) made 70% of its revenue from aluminum upstream operations while the remaining was from its Rolled Products segment. This segment produces aluminum sheet products, that form part of aluminum midstream operations.

Alcoa (AA) is the most diversified aluminum company. In 2Q15, its upstream, midstream, and downstream business accounted for 42%, 28%, and 30% of its total revenue, respectively.

Currently, Alcoa forms 0.86% of the iShares North American Natural Resources ETF (IGE) and 1.44% of the SPDR S&P Global Natural Resources ETF (GNR).

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Income sensitivity varies

Rio Tinto has the highest sensitivity to aluminum prices. It expects its underlying earnings to rise or fall by $441 million for every 10% rise or fall in aluminum prices.

Norsk Hydro expects its EBIT (earnings before interest and tax) to rise by 3,260 million Norwegian krone (~$391 million) for every 10% rise in aluminum prices. Similarly, its EBIT is expected to fall ~$391 million for every 10% fall in aluminum prices.

Alcoa expects its net income to rise $190 million for every $100 per ton rise in aluminum prices. Similarly, its net income is expected to fall $190 million for every $100 per ton fall in aluminum prices.

Alcoa is less sensitive to aluminum prices than some of the other primary producers. This is due to its exposure to fabrication. We’ll analyze the aluminum fabrication business later in this series. Next, we’ll learn more about aluminum upstream operations.


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