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Is There a Buying Opportunity in Alcoa?


Jul. 16 2019, Updated 3:07 p.m. ET


Alcoa (AA), the leading US-based aluminum producer, fell 9.0% in November. Alcoa has fallen 41% in 2018. Century Aluminum (CENX) and Rio Tinto (RIO) have fallen 54% and 6.3% year-to-date, respectively, based on their closing prices on November 30. In this part, we’ll discuss why Alcoa stock fell 9% in November.

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Metal prices

Aluminum prices continued to slide last month and traded below $2,000 per metric ton. Despite most observers predicting a supply deficit this year, aluminum prices have been weak amid concerns about Chinese demand. Chinese car sales have fallen sharply in September and October. The automotive sector is a leading aluminum end user. Alumina prices were also weakened in November. As an integrated aluminum producer, Alcoa is impacted negatively by lower alumina prices (AWC).

Weak outlook

Last month, Norsk Hydro gave a somewhat bearish assessment of aluminum markets (XME). The company expects global aluminum demand to rise 2%–3% YoY (year-over-year) in 2019. Norsk Hydro expects the same growth pace to continue in the next decade. The global aluminum demand is expected to rise 4% YoY.

As underlying metal prices fell in November, Alcoa also followed aluminum lower. In aluminum, world ex-China has been in a deficit for quite some time. While aluminum’s demand growth rates are expected to come down, supply growth is also expected to be lower. Not many producers are adding capacity outside of China. Even in China, producers are facing margin pressure amid lower aluminum prices that are reportedly leading to smelter closures. With a 2019 EV-to-EBITDA of 3.04x, Alcoa appears to offer reasonable value despite the known risks.


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