Alcoa (AA), the leading US-based aluminum producer, is having a somber year. The stock has gained a mere 5.3% this year, underperforming broader markets. Alcoa and Century Aluminum (CENX) fell sharply last year as metals and mining stocks plunged amid slowdown concerns.
Pure-play aluminum producer
Alcoa is a pure-play aluminum producer and sells bauxite, alumina, and aluminum. The company’s earnings are sensitive to alumina prices, aluminum prices, and physical aluminum premiums. Aluminum has lagged behind other base metals this year. Higher Chinese aluminum exports, withdrawal of US sanctions on RUSAL, and weakness in global automotive markets are among the factors that have been weighing heavy on aluminum. Over the last few years, demand growth from the automotive industry has been a key driver of aluminum prices. Automotive sales have been weak globally, which has hurt aluminum more than some of the other metals.
However, alumina prices have been strong. Although alumina too is down from its 2018 highs, it’s still at elevated levels considering the current aluminum prices. Higher alumina prices are positive for integrated aluminum producers like Alcoa and Rio Tinto (RIO).
We’ve seen a spike in Japanese Q2 aluminum premiums, while they have been stable elsewhere. Notably, aluminum markets are expected to be in a deficit this year. Typically, deficits should support higher premiums, but there is apparently a lot of aluminum sitting in warehouses globally. These inventories held in unofficial warehouses around the world seem to be making their way into aluminum markets.
Simply put, Alcoa’s outlook looks murky given the conflicting indicators.