Previously, we discussed how different primary aluminum producers manage their power supply. Now, we’ll explore how profit margins vary across different primary producers. We’ll look at the EBITDA (earnings before interest, tax, depreciation, and amortization) margin.
EBITDA margins vary
EBITDA (earnings before interest, tax, depreciation, and amortization) margins vary across aluminum producers. You can see this in the above chart. Rio Tinto (RIO) has one of the highest profit margins among primary aluminum producers. In 2014, its EBITDA margin was 24.17%. It was above its competitors. Century Aluminum’s (CENX) profit margins have been below other primary producers. Alcoa’s (AA) profit margins have been better than Century Aluminum, but that’s largely due to Alcoa’s fabrication operations.
Currently, Alcoa forms 2.53% of the Materials Select Sector SPDR ETF (XLB).
Why profit margins vary across producers
- Low-cost mining assets – According to Rio Tinto (RIO), it has “has the world’s largest share of first quartile aluminium production capacity.” Rio Tinto has access to low-cost bauxite reserves and 80% of its power needs are fulfilled by low-cost hydropower.
- Integrated operations – Century Aluminum doesn’t have alumina refining operations. The company doesn’t generate any captive energy. It has to purchase these materials from third parties that obviously sell them for a profit. It’s something like sharing the value chain profits with third parties.
- Labor costs – Norsk Hydro (NHYDY) has the highest captive power generation. Also, the company uses hydropower for ~80 of its needs. The company’s profit margins are less than Rio Tinto. This is could be due to the concentration of its smelters in Norway and Germany where the labor costs are higher compared to some of the other countries. Apparently, in one of its reports, the US Bureau of Labor Statistics found the average hourly manufacturing compensation costs in 2012 to be the highest in Norway.
Low-cost aluminum producers are better prepared to tide over the current low commodity price scenario.
In the next part, we’ll explore aluminum midstream operations.