In this part, we’ll discuss some of Alcoa’s (AA) bearish drivers. First, the US-China trade war scare has weaned investors away from metals (XME). China’s economic data have likely added to the pessimism. China’s car sales fell YoY (year-over-year) in July and August. The fixed-asset investment growth rates have also fallen to historical lows. The property boom that lifted China’s metal demand is fading. Amid a domestic demand slowdown, Chinese aluminum exports have risen sharply in 2018. Aluminum exports rose 17.1% YoY in the first nine months of 2018. Looking at the September sales data, US car sales have also shown signs of moderation. Considering the Fed’s tightening, we could see another slowdown in US automotive sales. The IMF has also cut its global growth forecast. As a result, aluminum’s demand growth will likely slow down.
Higher alumina prices, which have been a key driver of Alcoa’s earnings in 2018, might not persist in 2019. Norsk Hydro’s (NHYDY) Alunorte refinery, which is the largest alumina refinery outside China, has announced a partial restart. We could see alumina prices taper down more if Alunorte resumes its operations at full capacity.
US Midwest aluminum premiums came off their 2018 highs after the Section 232 tariffs lifted them to multiyear highs. Companies like Alcoa and Century Aluminum (CENX) benefit from higher aluminum premiums. Notably, the Section 232 tariffs, which were meant to protect US aluminum producers, have actually hurt Alcoa’s earnings. The company pays tariffs on the aluminum that it ships from its Canadian smelters to the US.
Next, we’ll discuss what investors can expect from Alcoa.