How Is Alcoa’s Commodity Business Positioned for 2H16?



Alcoa’s Commodity business

Alcoa (AA) is gearing up for its split, which is scheduled for the second half of 2016. After the split, the value-added company—which will be named Arconic—will produce precision components and other value-added products. The new Alcoa will become a pure play commodity producer (DBC).

After the split, Arconic investors might not be as interested in commodity prices. For Alcoa, commodity prices should become the key performance driver.

Article continues below advertisement

Earnings sensitivity

Alcoa’s (AA) earnings are sensitive to commodity prices. The company expects its fiscal 2016 net income to rise by $160 million for every $100 per metric ton rise in aluminum prices. Its net income is expected to fall by $160 million for every $100 per ton fall in aluminum prices.

Similarly, Alcoa’s annual net income in fiscal 2016 is expected to rise or fall by $20 million for every $10 per metric ton increase or decrease in alumina prices.

Among the other aluminum producers, Century Aluminum (CENX), Rio Tinto (RIO), and Norsk Hydro (NHYDY) also have varying sensitivities to commodity prices.

Series overview

Alcoa’s commodity business has performed well in the last quarter. You can explore this further in Alcoa or Arconic: Who Did Best in 2016? In this series, we’ll explore how Alcoa’s commodity business is doing this year and look at the factors that could impact its performance in 2H16. We’ll look at commodity prices as well as demand-supply trends in global markets.

Before we look at the various fundamental drivers, let’s see how Alcoa’s technical trading parameters are looking in August 2016. Let’s begin by looking at Alcoa’s short interest in the next part of this series.


More From Market Realist