Alcoa’s (AA) 2018 earnings have been supported by higher alumina prices. Alcoa is an integrated aluminum producer that produces alumina as well as aluminum. Alumina markets have been disturbed this year for a few reasons. First, we saw the partial curtailment of Norsk Hydro’s (NHYDY) Alunorte refinery that kicked off some 260,000 metric tons of monthly alumina supply. Then, the sanctions against RUSAL pushed alumina prices to record highs. There were also supply disruptions from labor issues at Alcoa’s Australian plant. The spike in alumina prices hurt the earnings of companies like Century Aluminum (CENX), which source alumina from third parties.
Alcoa has reached a labor agreement in Australia. As for Alunorte, Norsk Hydro now has an agreement with the local governments, but the matter is still in the courts. During the conference call to announce the agreement with the government, Norsk Hydro said that the company would take three to four weeks to ramp up production at Alunorte once it receives the go-ahead from the court.
Alumina prices are already off their 2018 highs and we could see them taper even more once Alunorte ramps up production. This could mean that Alcoa might miss the alumina-fueled earnings windfall next year.
On the positive side, aluminum seems to have bottomed out near the 2,000 per metric ton price level. This coupled with Alcoa’s reasonable valuations could mean that the stock’s downside could be limited from these levels. Please read Why It’s Tough to Hate Alcoa at These Prices for Alcoa’s bullish drivers.