Raw materials prices
Aluminum’s value chain starts with the mining of 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. Alcoa was the top alumina producer in 2015, with a strong first-quarter cost position on the global cost curve.
Notably, integrated producers such as Alcoa stand to gain from rising alumina prices. Alcoa also sells bauxite and alumina along with primary aluminum. The company’s 2017 earnings should get a boost from higher alumina prices (DBC).
Alumina prices have shown strength over the last couple of months. Two key factors have driven alumina’s price action: First, alumina was likely in a supply deficit in 2016 following Chinese curtailments. Second, higher coal prices are supporting alumina prices.
Remember that higher raw materials prices raised production costs for Chinese aluminum smelters. Some smelters rely on imported alumina and coal. As input costs have surged, aluminum prices have gotten a natural boost. Lower Chinese aluminum production also supported aluminum prices in 2016.
So how far could cost-push inflation support aluminum prices? We’ll explore this question in the next part of the series.