Alcoa’s upstream performance
As we previously discussed, Alcoa (AA) will be split into two companies later this year. So, it’s prudent that we look at the two companies separately while analyzing Alcoa’s outlook. In this part of the series, we’ll be looking at the different factors that could drive Alcoa’s upstream business in 2016.
There are three key factors that appear likely to drive the 2016 performance of Alcoa’s upstream business. First, we have commodity prices. Movement in commodity prices (COMT) would be a key driver of Alcoa’s 2016 performance. Aluminum and alumina are the two commodities that Alcoa sells. Commodity prices would depend on a host of factors as we’ll explore in the coming parts of the series.
Second, there are physical premiums. Aluminum producers including Alcoa, Century Aluminum (CENX), Rio Tinto (RIO), and Norsk Hydro (NHYDY) also get a physical premium along with the prevailing aluminum prices. Movement in physical premiums would be a key driver of Alcoa’s 2016 performance. It’s important to note that aluminum premiums fell steeply last year and negatively affected aluminum producers’ performance.
Finally, Alcoa’s cost-cutting initiatives will play a role as Alcoa is looking to further streamline its operations to improve its cost positioning on the global cost curve. Improving cost positioning has become imperative for aluminum producers as metal prices are trading at depressed levels. You can read more about different aluminum producers’ cost positioning in our series How to Play the Aluminum Industry: A Comparative Analysis
Meanwhile, the biggest driver of Alcoa’s 2016 performance could be the movement in aluminum prices. In the next part of this series, we’ll be looking at the different factors that could drive aluminum prices in 2016.