Aluminum prices in the face of global turmoil
The LME (London Metals Exchange) three-month aluminum contract has closed below the psychologically crucial level of $1,500 per metric ton in each trading day so far in 2016. Aluminum last closed above $1,500 level on December 31. The graph below shows the recent trend in aluminum prices.
Gauging the impact of earnings
Aluminum prices are a key driver of aluminum companies’ earnings. Alcoa (AA) expects its net income to rise by $190 million for every $100 per ton rise in aluminum prices. Similarly, its net income is expected to fall by $190 million for every $100 per ton fall in aluminum prices. So it’s important to note that Alcoa’s net income was negatively impacted by $420 million in 4Q15 due to lower metal prices. You can find out more about Alcoa’s 4Q15 earnings in the Market Realist series Alcoa’s 4Q15 Earnings Topped Wall Street Estimates.
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 about 3.3 billion Norwegian krone, or approximately $391 million, for every 10% rise in aluminum prices. Similarly, its EBIT is expected to fall by about $391 million for every 10% fall in aluminum prices.
Metal pain on the horizon?
While copper and most other base metals (DBB) are trading below their 2015 lows, aluminum is now trading above its 2015 lows. However, aluminum prices could weaken further in 2016. You can find the outlook for aluminum prices in our series Alcoa’s 2016 Outlook: What’s Driving the Recent Downfall? Along with aluminum prices, producers also get a physical aluminum premium. In the next part of the series, we’ll explore how aluminum premiums are trending in 2016.
You can also consider the SPDR S&P Metals and Mining ETF (XME) to get a diversified exposure to US-based metal companies. Together, Alcoa and Allegheny Technology (ATI) make up about 8.1% of XME’s total portfolio.