Aluminum prices are the key driver of aluminum producers’ earnings. Although shipments and cost control initiatives tend to impact earnings, the biggest impact generally comes from commodity prices. Alcoa (AA) expects its 2017 EBITDA (earnings before interest, tax, depreciation, and amortization) to rise $226 million for every increase in aluminum prices by $100 per metric ton. Other aluminum producers (DIA) (DJIA-INDEX) like Century Aluminum (CENX), Norsk Hydro (NHYDY), and Rio Tinto (RIO) also have varying sensitivities to aluminum prices.
Outperformed other base metals
Aluminum prices have shown strength in 2017 and have built on 2016 gains. So far, aluminum has risen 14.7% in 2017—compared to a 13.4% rise in 2016. Aluminum has outperformed other base metals like copper and zinc in 2017.
The key driver of aluminum prices this year has been expectations of higher demand and lower supply. Optimism over China’s capacity curtailment has driven aluminum to higher price levels. Notably, China’s publicly announced policy of cutting its excess steel capacity had a positive impact on steel prices.
Impact on 1Q17 earnings
The London Metals Exchange aluminum contract averaged $1,858 per metric ton in 1Q17. Prices averaged $1,709 per metric ton in 4Q16 and $1,515 per metric ton in 1Q16. Although there’s typically a pricing lag in aluminum companies’ sales, higher aluminum prices in 1Q17 should support their 1Q17 earnings.
Meanwhile, with 1Q17 earnings around the corner, it will be interesting to see how analysts rate aluminum producers. In the next part, we’ll look at analysts’ ratings for Alcoa.