As discussed previously, Alcoa’s (AA) capacity cuts are among the reasons behind the current uptrend in aluminum prices. We don’t have the earnings sensitivity data for Century Aluminum (CENX), but Century may be the biggest beneficiary of rising aluminum prices. The company is a pure play primary aluminum producer, and its earnings come entirely from primary aluminum.
Century Aluminum’s earnings have come under severe pressure because of the steep correction in aluminum prices. Century Aluminum posted a gross loss in 3Q15, which can be seen in the graph above.
Generating a gross loss means that a company is not generating sufficient revenues to cover the cost of goods sold, let alone to meet overhead costs and interest expenses.
This is a delicate situation for any enterprise. Any rise in aluminum prices could have higher incremental benefits for Century as compared to other primary aluminum producers including Rio Tinto (RIO).
Century Aluminum had a cash burn of $44 million in 3Q15. This is a big amount looking at Century Aluminum’s size. To be sure, Century Aluminum has a market capitalization of only about $390 million.
In its 3Q15 earnings conference call, Century Aluminum said that it expects to achieve the break-even point in cash flow in 2016 at $1,525 per metric ton aluminum prices, assuming physical aluminum premiums stay at the same levels.
Century Aluminum arrived at this figure after accounting for “sustaining capital expenditures, cash taxes, interest expense, SG&A expenses and pension contributions.” However, the assumption does not include any discretionary capital expenditure.
Spot aluminum prices were trading at ~$1,450 per metric ton when Century Aluminum announced its 2016 plans. However, now aluminum prices are trading above $1,500 per metric ton. What’s better? US (SPY) (DIA) Midwest aluminum premiums have also risen by $0.01 per pound in the last week.
Can aluminum prices sustain?
It remains to be seen how long aluminum prices will sustain above $1,500 per ton. Typically, any uptrend in aluminum prices has led to higher Chinese aluminum exports, again putting pressure on aluminum prices.
Copper prices have fallen in recent weeks as demand concerns have overtaken the positive sentiments generated Glencore and Freeport-McMoRan’s capacity cuts.
Visit Market Realist’s Aluminum page to track the recent developments in this industry.