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Rio Tinto: In-Line Aluminum, More-than-Expected Bauxite Production

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Aluminum production

Rio Tinto (RIO) and Alcan combined in 2007 to form Rio Tinto Alcan, a global leader in the aluminum industry. Its fully integrated facilities include high-quality bauxite mines, large-scale alumina refineries, and some of the world’s lowest-cost aluminum smelters. A sustained rise or fall in aluminum shipments is a significant indicator that affects the stock value of aluminum producers such as Alcoa (AA) and Century Aluminum (CENX).

Alcoa currently forms 2.6% of the Materials Select Sector SPDR ETF (XLB) and 0.79% of the iShares North American Natural Resources ETF (IGE).

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Strong production

  • After setting a new first-half production record at 21.2 million tons, Rio Tinto’s bauxite production sustained its strong performance in the third quarter with an increase of 4% year-over-year (or YoY). This was mainly due to strong performance at Weipa and the ramp-up of Gove.
  • Alumina production was also up 4% YoY in the nine months ending September 30. This was mainly driven by improved productivity at Queensland Alumina and Yarwun.
  • Aluminum’s production for 9M15 was marginally higher year-over-year. Record production at eight smelters offset lower production at Kitimat, as Rio Tinto commissioned a modernized smelter. Kitimat will ramp up towards its nameplate capacity of 420 thousand tons, expected to be completed by early 2016. This would be a 48% increase over its previous nameplate capacity.

Guidance almost the same

  • RIO kept its guidance unchanged at 43 million tons for bauxite, 8 million tons for alumina, and 3.3 million tons of aluminum for 2015.
  • However, it reduced its guidance for its expected share of alumina production from 8 million tons to 7.8 million tons.
  • Going forward, the expansion of the Kitimat smelter’s ramp-up towards nameplate capacity of 420 million tons per year of production should help the company’s aluminum volumes.

The company is also focusing on value-added products in aluminum, which should reduce the need for some of its customers to re-melt the material. This change could lead to premium prices.

Alcoa (AA), which released its 3Q15 results on October 8, 2015, now expects the aluminum industry to record a surplus of 551,000 metric tons in 2015. That’s 210,000 metric tons less than its earlier forecast. This could be a positive catalyst for aluminum producers going forward.

For more on aluminum, visit Market Realist’s Aluminum page.

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