Rising alumina prices
Aluminum’s value chain starts with mining bauxite, one of the most abundant metals in the earth’s crust. Due to bauxite’s many impurities, it must be refined to produce alumina, which is then processed to produce raw aluminum.
Companies such as Rio Tinto (RIO), Norsk Hydro (NHYDY), and Alcoa (AA) have alumina refining and aluminum smelting operations. However, Century Aluminum (CENX) produces aluminum by sourcing alumina from outside parties.
Alumina price index
Historically, most alumina producers used to price their products at a percentage of aluminum prices (DBB). However, over the last few years, several aluminum companies have been gradually moving to the alumina price index. Alumina prices have risen steeply over the last couple of months, as can be seen in the graph above.
Alcoa was the top alumina producer last year, with a strong first-quarter cost position on the global cost curve. Notably, Alcoa’s Alumina segment reported lower revenue in 3Q16 compared to 2Q16. The segment’s 3Q16 revenue was negatively impacted by lower alumina prices. The Alumina segment reported a third-party realized price of $287 per metric ton in 3Q16, compared to $304 per metric ton in 2Q16.
Boost for Alcoa
Higher alumina prices should boost Alcoa’s near-term performance. However, companies such as Century Aluminum, which source alumina from third parties, could see spikes in their unit production costs due to higher alumina prices.
While higher alumina prices would give a short-term boost to Alcoa’s performance, bauxite could be its key long-term growth driver. You can read How Integrated Operations Would be Alcoa’s Competitive Advantage to explore this notion further.
In the next article, we’ll see why Arconic’s (ARNC) investors stand to benefit from Alcoa’s upward price action.