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What Really Drove Alcoa’s Strong Upstream Earnings in 2Q16?

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2Q16 upstream performance

As we discussed in the previous part of this series, Alcoa (AA) managed to beat consensus earnings estimates in 2Q16. In this part, we’ll look at Alcoa’s 2Q16 upstream performance in an effort to understand how the upstream business helped.

Remember, Alcoa does not provide the individual net profit figures for its different businesses. However, we do get the ATOI (after-tax operating income) for its different business segments.

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2Q16 earnings

On a consolidated basis, Alcoa generated ATOI of $444 million in 2Q16. By comparison, the company generated an ATOI of $291 million in 1Q16 and $567 million in 2Q15.

The sequential increase in ATOI was mainly due to AA’s Alumina segment, whose ATOI increased from $8 million to $109 million as alumina price rose sharply during the quarter. Higher aluminum also prices helped Alcoa’s Primary Metals Segment improve its ATOI from $14 million to $41 million.

It’s important to note that higher alumina prices benefit Alcoa, Norsk Hydro (NHYDY), and Rio Tinto (RIO) as well. Century Aluminum (CENX), on the other hand, is negatively impacted by higher alumina prices because it sources alumina from third parties.

Productivity gains

According to Alcoa, it realized productivity gains of $237 million in 2Q16. Productivity gains helped Alcoa offset the impact of lower metal prices (DBB) in the upstream business and pricing pressure in the downstream business.

But the downstream ATOI didn’t see such a significant jump. (We’ll explore this further later in the series.) So higher alumina prices coupled with productivity gains helped Alcoa post better-than-expected earnings in 2Q16.

But can Alcoa’s upstream business continue to deliver next quarter as well? We’ll explore this further in the next part.

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