Higher commodity prices
Now that we have examined aluminum producers’ 3Q16 earnings, let’s look now at what factors could impact their 4Q16 earnings. We should remember that the earnings of commodity producers (XME) including Alcoa (AA), Century Aluminum (CENX), Norsk Hydro (NHYDY), and Rio Tinto (RIO) are sensitive to commodity prices.
Commodity prices have shown strength so far in 4Q16. Although the LME (London Metals Exchange) three-month aluminum contract has pared some of its post-election gains, it’s still trading in the ballpark of $1,700 per metric ton levels. If aluminum prices manage to hold on to current price levels, aluminum producers could report sequentially higher profitability in 4Q16.
Alumina (aluminium oxide) prices have also shown strength in 4Q16. Historically, most alumina producers used to price their products at a percentage of aluminum prices (DBB). However, over the past few years, several aluminum companies have been gradually moving to the API (alumina price index). Alumina prices have risen steeply over the past couple of months.
Alcoa was the top alumina producer last year, with a strong first-quarter cost position on the global cost curve. The company’s Alumina segment will stand to gain from higher API, but Century Aluminum’s 4Q16 earnings could be negatively impacted due to higher alumina prices.
Meanwhile, investors also have to keep an eye on cash flows. In the next part, we’ll look at different aluminum producers’ 3Q16 cash flows.