In previous articles, we’ve seen how Alcoa’s financial position looks strong due to its free cash flow generating capacity amid higher commodity prices.
We’ve also discussed how the company is virtually debt-free looking at its net debt levels. In this article, we’ll take a look at the major risks facing Alcoa (AA) and other aluminum producers this year.
US smelting capacity
As President Donald Trump looks inclined to impose tariffs on aluminum imports, we could see an increase in US aluminum production. Century Aluminum (CENX) has already indicated that it intends to bring some offline capacity back after the tariffs are implemented. Higher US aluminum production at a time when the world is not exactly short on aluminum could further add to the global aluminum supply (RIO) (S32).
Furthermore, if President Trump goes ahead with tariffs on steel and aluminum (XME), it could be a trigger for a global trade war, according to some analysts. Retaliation from other countries could dampen the global market sentiment, which could have a domino effect on aluminum prices. It’s worth noting that Alcoa was counting bauxite sales to China as a key growth driver.
A rising US dollar amid further tightening by the US Federal Reserve is another risk for aluminum as well as other dollar-denominated commodities. Notably, among other factors, a weaker greenback supported aluminum prices last year.
The final word
A lot of negatives already seem baked in to Alcoa’s valuation. The stock’s downside could be limited unless we see another wave of global sell-offs like we saw toward the end of January.
In the next and final article, we’ll see how analysts are rating Alcoa and other aluminum producers.