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Will Alcoa’s Primary Metals Segment Turn Around in 4Q15?

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Alcoa’s Primary Metals segment

Alcoa’s (AA) Primary Metals segment produces primary aluminum. It’s been under pressure as the all-in aluminum price has corrected sharply. Although Alcoa has taken several steps, including the closure of high-cost facilities, these were not enough to compensate for lower aluminum prices.

In this part of the series, we’ll discuss the Primary Metals segment’s 3Q15 financial results and explore if 4Q15 earnings could be any better.

You can also consider the Materials Select Sector SPDR ETF (XLB) to get a diversified exposure to the basic material sector.

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Key highlights

  • Third party shipments in 3Q15 were 615 thousand tons, down 4.2% year-over-year.
  • The average transaction price was $1,901 per metric ton, down more than 25% compared to the corresponding quarter last year.
  • The Primary Metals segment posted an ATOI (after tax operating income) of -$59 million in 3Q15 compared to $245 million in the corresponding quarter last year.

Outlook

Alcoa expects the Primary Metals segment’s ATOI to increase by $15 million in 4Q15, excluding the impact of currency and aluminum prices. According to Alcoa, the company has launched an improvement program that should help it realize benefits between $110 million and $130 million next year. According to Alcoa, the program has four major levers: operations, procurement, overhead, and value-add volume.

Having said that, there’s nothing much a primary aluminum producer can do when aluminum prices continue to trade at subdued levels. Alcoa’s cost-cutting measures and productivity improvements can help it offset some of the impact from lower aluminum prices, but earnings for the Primary Metals segment are not expected to improve meaningfully until we see an improvement in aluminum pricing.

Century Aluminum (CENX), another leading primary aluminum producer, has also been under pressure as aluminum prices have failed to rise.

In the next part, we’ll explore the 3Q15 financial performance of Alcoa’s Global Rolled Products segment.

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