Aluminum prices are a key driver of aluminum companies’ earnings. 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. It’s important to note that Alcoa’s net income was negatively impacted by $219 million in 3Q15 due to lower aluminum prices.
According to Rio Tinto (RIO), its underlying earnings 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.
Aluminum is trading lower
The above graph shows the falling trend in aluminum prices. Spot aluminum closed at $1,522 per metric ton on October 19. So far in October, aluminum has lost ~2.8%. Aluminum has been among the worst performing base metals (DBB) in October. Spot copper and zinc rose by 2.8% and 6% during October, respectively.
Major copper and zinc producers have announced production cuts. This seems to have some impact on copper and zinc prices. It’s at least better than aluminum— years of supply cuts by major producers failed to restore the desired balance in the market. Aluminum production cuts by companies like Alcoa and Century Aluminum (CENX) have been counterbalanced by growing Chinese exports.
The outlook for base metals, including copper and aluminum, looks bearish as the Chinese economy continues to falter. We’ll explore the Chinese economy’s recent indicators later in this series. In the next part, we’ll analyze the recent movement in physical aluminum premiums.