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Management Was Optimistic on Alcoa’s Downstream Business

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Jan. 22 2016, Updated 8:05 a.m. ET

Alcoa’s downstream business

Previously, we looked at the different factors that could drive Alcoa’s (AA) upstream business in 2016. To sum things up, aluminum and alumina prices could weaken further this year. Moreover, investors could dump risk assets, including commodities (DBC), in their flight for safety. China’s worsening slowdown would only add to commodity producers’ worries in 2016. Companies like BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE) have already hit fresh 52-week lows in the first trading week of the year.

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Downstream business is thriving

However, Alcoa is not a pure-play commodity company. It also produces value-add components and is a major supplier in the aerospace component and auto body sheet market. The company’s downstream business has been thriving over the last couple of years while its upstream business was bleeding due to falling commodity prices. Before we analyze how Alcoa’s downstream business could play out in 2016, let’s take a quick look at the segment’s recent quarterly performance.

4Q15 performance

The graph above shows the financial performance of Alcoa’s EPS (Engineered Products and Solutions) segment. The segment forms part of Alcoa’s downstream business. Alcoa’s downstream revenues rose 7% year-over-year in 4Q15. This partially offset the 25% fall in upstream revenues during the quarter.

Alcoa’s downstream business contributed almost 80% of the company’s ATOI (after tax operating income) in 4Q15. Alcoa’s management was optimistic about its downstream performance during the company’s 4Q15 earnings call. You can read more about the key takeaways from Alcoa’s 4Q15 earnings call in our series Alcoa’s 4Q15 Earnings Topped Wall Street Estimates.

Alcoa has signed several multibillion-dollar contracts in its downstream business. This would support the segment’s performance in the long term. However, the downstream business might not have a merry ride in 2016 as we’ll explore in the next part of the series.

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