Aluminum prices are a key driver of aluminum companies’ earnings. Rio Tinto’s (RIO) sensitivity to aluminum prices is one of the highest in the industry. It expects its underlying earnings to rise or fall by $441 million for every 10% rise or fall in aluminum prices.
Norsk Hydro (NHYDY) 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 (AA) 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. Currently, Alcoa forms 0.87% of the iShares North American Natural Resources ETF (IGE).
Aluminum prices trading weakly
Spot aluminum on the London Metals Exchange closed at $1,557 per metric ton on September 25. Aluminum has traded weakly over the last few trading sessions. Spot aluminum hit a six-year low of $1,496 per metric ton on August 24.
However, aluminum prices subsequently rose to $1,621 per ton on September 11. The rally was short-lived and prices corrected after the prices peaked. Year-to-date, aluminum prices are down more than 15%.
Copper has also fallen
Copper prices have also lost more than 6% over the last week. Earlier this month, copper prices had risen sharply after major copper producers such as Glencore (GLNCY) and Freeport-McMoRan (FCX) announced production cuts. However, the rally didn’t last long as weak Chinese data took its toll on prices. Copper prices are down more than 20% year-to-date.
Meanwhile, the outlook for base metals such as copper and aluminum looks bearish as the Chinese economy continues to falter. We’ll explore the recent indicators of the Chinese economy later in this series. Before that, in the next part, we’ll analyze the recent movement in physical aluminum premiums.