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Will Alcoa Benefit from Higher Aluminum Prices?

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Aluminum prices

Aluminum has gained ~11% year-to-date. This was preceded by a 13.4% rise in 2016. The market sentiment for aluminum improved considerably in 2016, though at the start of the year, prices looked set to breach their 2009 lows.

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Earnings sensitivity

Commodity producers’ (XME) earnings, including those of Century Aluminum (CENX), Norsk Hydro (NHYDY), and Rio Tinto (RIO), are sensitive to commodity prices. Alcoa (AA) expects its 2017 EBITDA (earnings before interest, tax, depreciation, and amortization) to rise by $226 million for every $100 per-metric-ton rise in aluminum prices. Its EBITDA is expected to fall by $226 million for every $100 per-metric-ton fall in aluminum prices.

In particular, aluminum prices have shown resilience so far in 2017. Let’s see what factors are supporting aluminum prices.

Key drivers

Higher energy prices are boosting metal prices. There has been a broad-based rally in industrial metals this year. Copper and iron ore are trading with decent yearly gains. The positive sentiments in metals and mining space are also supporting aluminum prices.

Higher alumina prices are supporting aluminum prices as well. As input costs, especially for coal and alumina, have surged, aluminum prices are getting a natural boost. We’ll look at the recent trend in alumina prices later in this series.

Although aluminum saw some downward pressure late last week, prices are still holding steady. Higher aluminum prices should boost aluminum producers’ 1Q17 earnings. Remember, as Alcoa is now a pure-play commodity producer, its fortunes are now even more closely tied to commodity prices.

Meanwhile, along with aluminum prices, investors should also keep track of physical aluminum premiums. We’ll discuss this more in the next article.

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