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How Alcoa’s Growth Drivers Could Change in 2017



Alcoa’s growth drivers

After Alcoa’ (AA) split, Arconic’s (ARNC) investors might not be too interested in commodity prices. For Alcoa, commodity prices should become a key performance driver. Alcoa’s correlation with aluminum prices fell steeply after the company announced its split in September 2015.

Since Alcoa is now a pure-play commodity producer like Century Aluminum (CENX) and Rio Tinto (RIO), its fortunes are closely tied to commodity prices.

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Commodity prices

Aluminum and alumina are the two commodities that Alcoa sells. Aluminum producers’ (XLB) earnings are sensitive to aluminum prices.

Alcoa expects its annual EBITDA (earnings before interest, tax, depreciation, and amortization) to rise $233 million for every $100-per-metric-ton rise in aluminum prices. Its EBITDA is expected to fall $233 million for every $100-per-metric-ton fall in aluminum prices.

Similarly, Alcoa’s annual EBITDA is expected to rise or fall $63 million for every $10-per-metric-ton rise or fall in alumina prices.

Physical premiums

In 2017, we can expect Alcoa to closely follow movements in commodity prices. Along with aluminum and alumina prices, Alcoa investors should also keep a close eye on physical premiums in 2017. It’s important to note that aluminum premiums fell steeply in 2015, negatively affecting aluminum producers’ performances. Though we saw some recovery in premiums toward the end of 2016, they’re still far below their 2015 highs.

In the next article, we’ll analyze the different factors that could impact aluminum prices in 2017.


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