Alcoa (AA) has seen upward price action in August. The stock has risen 4.3% in August, while it’s still down 16.2% YTD (year-to-date). Century Aluminum (CENX) and Rio Tinto (RIO) have fallen 33.8% and 1.8%, respectively, YTD. So far, the SPDR Dow Jones Industrial Average ETF (DIA) has risen 7.0% in 2018 based on the closing prices on August 29.
Talking of Alcoa, while lower aluminum prices led to the sell-off, the company’s updated 2018 guidance spooked investors. During the second-quarter earnings release, Alcoa lowered its 2018 adjusted EBITDA guidance to $3.0 billion–$3.2 billion from the previous guidance of $3.5 billion–$3.7 billion. Alcoa also talked about the negative impact from the Section 232 tariffs.
After the slide in Alcoa stock following its second-quarter earnings, we noted that the stock seemed cheap based on its forward valuation multiples. Since then, Alcoa has risen more than 10%. Aluminum prices are off their 2018 lows and still look strong. Raw material prices including alumina are holding firm, which is supporting aluminum. The upcoming winter month capacity cuts in China should also support aluminum and alumina prices. Since Alcoa is long on alumina, the company benefits from higher alumina prices.
Along with these fundamental drivers, the sanctions on RUSAL, the leading Russian aluminum producer, could drive aluminum prices. Aluminum rose to multiyear highs in April after President Trump announced sanctions on RUSAL. However, the sanctions were subsequently relaxed, which triggered a sell-off in aluminum prices.
According to Reuters, citing industry sources, “Rusal will take a major hit if sanctions are not lifted by late August.” However, the report said, “In July, U.S. Treasury Secretary Steven Mnuchin said the United States was in productive talks with Rusal to remove it from the list.”
With Russia’s alleged meddling in the US presidential election, the Trump Administration might not want to be seen as going soft on Russia especially amid the mid-term elections.