As we noted previously, Alcoa is now a pure-play aluminum producer. The company is an integrated aluminum producer with bauxite mining, alumina refining, and aluminum smelting operations. With the company’s fortunes now even more closely tied to aluminum prices, you might expect the stock to closely follow aluminum prices. Let’s see if that’s been the case.

What’s Driving the Divergence between Alcoa and Aluminum?

Correlation has fallen

Alcoa (AA) had a high correlation of more than 0.9 with aluminum prices in 2015. However, the correlation fell to 0.64 in the period between January 1, 2016, to October 31, 2016. The lower correlation could be due to Alcoa’s split as markets started to factor in the split, which was scheduled for November 1, 2016.

Meanwhile, and rather interestingly, Alcoa’s correlation with aluminum prices fell further to 0.55 between November 1, 2016, and June 26, 2017. This lower correlation seems intriguing, as Alcoa’s price action should now closely track aluminum prices. However, the opposite seems to be happening. Notably, even Century Aluminium’s (CENX) correlation with aluminum has fallen to 0.35 in 2017 year-to-date compared to 0.76 in 2016 and 0.87 in 2015. Let’s look at the possible reasons for this divergence.

Alumina prices

In our opinion, alumina prices could be driving the recent divergence between Alcoa and aluminum prices (DBC). We should remember that Alcoa produces its own alumina while Century Aluminum buys alumina from third parties. So, while lower alumina prices are beneficial for Century Aluminum, they’re negative for Alcoa. While alumina prices have been weak this year, aluminum has largely held steady. However, since movements in alumina prices also impact aluminum producers’ profitability, we’ve seen a divergence in their price action with aluminum (RIO)(NHYDY).

With the first half of 2017 behind us, let’s see what lies ahead for aluminum and aluminum producers in the second half of the year.

Latest articles

WeWork is gearing up for an IPO. On Wednesday, the company made its IPO filing with the SEC public and expects to garner $3.5 billion from its IPO.

After FCC Chairman Ajit Pai recommended the approval of the T-Mobile–Sprint merger, Representative David Cicilline urged the FCC to allow public comment.

Cresco Labs (CRLBF) is set to report its Q2 earnings on August 21 after the market closes. The company's stock fell 5.3% yesterday.

Cannabis stocks mostly traded in positive territory today. Supreme Cannabis (FIRE) and Aurora Cannabis (ACB) rose about 9.5% and 5.5%, respectively.

NVIDIA (NVDA) stock soared 6% in today’s trading session as its Q2 earnings for fiscal 2020 beat estimates. However, its guidance missed estimates.

Nio Inc. (NIO) has disrupted the automotive space since 2014 but only made waves in the market since its IPO. Investors have suffered numerous setbacks.