Revenues for commodity companies such as BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE) are a function of commodity (COMT) prices and shipments. In the previous part of the series, we looked at aluminum and alumina prices and how they would affect Alcoa’s 2Q16 revenues. Now, we’ll see how shipments could impact Alcoa’s revenues. It’s important to note that shipments depend on demand from end consumers as well as any portfolio actions the company has undertaken.
Alcoa (AA) has been proactive in curtailing its high-cost capacity to survive in the current pricing environment. Its smelting capacity has come down by more than one-third since 2007. The dual impact of fewer shipments and lower commodity prices has negatively affected Alcoa’s revenues in the last few quarters.
Alcoa expects its aluminum production to fall 50,000 metric tons in 2Q16. This represents a 7.5% decline as compared to 1Q16 production. However, the company expects its alumina production to be flat in 2Q16 compared to the sequential quarter. Nonetheless, the Alumina segment’s revenues should rise in the previous quarter, as alumina prices have risen more than 22% as compared to 1Q16.
However, the company’s Aluminum segment revenues might fall slightly, as the increase in aluminum prices might not fully offset lower shipments. Overall, Alcoa’s upstream revenues could be somewhat higher in 2Q16 as compared to the previous quarter.
Along with revenues, investors should also look at the different profitability metrics. In the coming parts of the series, we’ll see how Alcoa’s profits could play out in 2Q16.