Kaiser Aluminum Corp

When forward prices are lower than spot markets, it’s described as “backwardation.” When future prices are higher than the current spot prices, it’s referred to as “contango.”

Aluminum fabricators like Kaiser Aluminum could play on rising aluminum demand. Kaiser Aluminum has shown strength amid the meltdown in other metal plays.

The aluminum premium is a surcharge that aluminum consumers must pay on top of the prevailing prices in order to take delivery of the metal from the warehouses.

On June 8, Alcoa (AA) released its Q2 earnings. In this series, we’ll analyze Alcoa’s Q2 earnings in detail.

Aluminum fabricators have benefited from the massive drop in aluminum premiums. Sometimes fabricators face a challenge passing these premiums on to their buyers.

Total construction spending includes both residential and nonresidential spending. It hit the annual rate of $1 trillion in April.

Nonresidential construction spending increased 4.7% in March. It accounts for about two-thirds of total construction spending.

In 1Q15, Century Aluminum’s global shipments increased 9%. US shipments increased 15% largely due to the acquisition of the Mt. Holly smelter from Alcoa.

Ford’s 1Q earnings are expected on April 28. Ford is an important customer for Alcoa, and its latest F-150 pickup truck is the first mass market aluminum body vehicle.

Rio Tinto’s (RIO) aluminum production in 1Q15 was in line with 1Q14. This is despite a partial shutdown at Kitimat.

Alcoa has lost almost a sixth of its market capitalization so far in 2015. Aluminum industry indicators have taken a beating since the middle of last year.

Alcoa’s (AA) downstream business generated after-tax operating income of $191 million in 1Q 2015, its highest-ever after-tax operating income.

Alcoa (AA) reported its 1Q 2015 earnings on April 8. It reported net income of $195 million on revenues of $5.8 billion.

Constellium completed the expansion of its automotive operations in Singen. It’s also working to expand its automobile capacity in France.

In the third quarter, Constellium warned that its Aerospace and Transportation, or A&T, segment’s profits could come down.

Constellium is engaged in the aluminum fabrication business. Its fourth quarter earnings were a positive surprise for the markets.

Alcoa gets more than $1 billion in revenues from nonresidential construction. Investors should thus track nonresidential construction activity closely.

It’s important that investors understand the key aluminum industry indicators. There are several ways to play the aluminum industry. You can invest in primary aluminum producers.

Alcoa is an integrated player in the aluminum value chain. This means its operations extend from bauxite refining to aluminum fabrication.

Alcoa (AA) is the largest aluminum company in the US. It’s among the top three aluminum producers globally. The company was founded in 1888.

Century Aluminum has the highest price-to-earnings ratio compared to its industry peers.

Engineered products and services form Alcoa’s downstream operations. It’s Alcoa’s most profitable segment. The segment’s EBITDA margin was 23.5% in the third quarter.

Alcoa’s third quarter revenues increased 8.2%—compared to 3Q13. For aluminum companies, the total revenue equals the average selling prices multiplied by the total shipments.

Currently, Constellium has close to $400 million in cash on its balance sheet. It’s expected some of this cash will be used to acquire Wise Metals.

Constellium expects this deal to be funded through a mix of debt and equity. It also plans to use some cash on its balance sheet.

The U.S. markets have been resilient. Analysts expect the demand for both steel and aluminum in the U.S. to grow by more than the global average.

With this acquisition, Constellium becomes an international company. It also moves into upstream aluminum operations, through the aluminum recycling facilities of Wise Metals.

Aluminum prices have been volatile this year. Aluminum prices touched their four-year low in 2014. However, the prices rebounded sharply and reached ~$2,100 per ton.

As part of its transformation, Alcoa has been developing innovative products for its customers. It has been enhancing its product offerings through acquisitions.

The aluminum process starts by extracting bauxite from the Earth’s crust. The bauxite is refined into alumina. Alumina is a key raw material—along with carbon and electricity.

Alcoa and Century Aluminum delivered excellent returns. Century Aluminum led the way. It’s stock has more than tripled since the beginning of 2013. This surprised analysts.

Litigations can be a big blow for aluminum producers. Litigations are expected to decrease aluminum prices and premiums. This will be negative for aluminum companies like Alcoa Inc. (AA), Century Aluminum (CENX), Kaiser Aluminum Corp. (KALU), and Constellium (CSTM).

Using aluminum to make vehicles has its own nuances. There have to be new production lines for the automobile companies. Aluminum can’t be welded easily like steel. This reduces the mass shift to aluminum. Aluminum also costs more than steel. It’s more than double steel’s price. However, a slow and steady shift is happening.

Aluminum pricing is a complex mechanism. There are various components to the pricing. The primary reference point is the quoted price on the London Metal Exchange (or LME). Along with this price, the aluminum buyers have to pay a premium for receiving metal deliveries. This premium varies between different regions.

The entire metals sector has been changing during the past several quarters. There have been upgrades by the brokerages—led by improving market conditions. It’s important to note that all the metal shares, including aluminum companies, were negatively impacted during the crisis.

The aluminum industry has a value chain that consists of upstream and downstream companies. Upstream companies are engaged in mining and refining operations. The downstream operations involve smelting, casting, and fabricating the refined alumina.

Century Aluminum was formed in 1995 by Glencore International. Glencore is one of the world’s largest diversified natural resource companies. It produces and markets over 90 commodities worldwide. Century Aluminum went public in 1996.

Alcoa’s revenues have been on a downward trend for the past three years. In 2014, revenue is expected to be ~1% lower over the revenue in 2013. The aluminum market has been growing. The deceleration in revenues is due to falling aluminum prices. Aluminum prices fell to a four-year low this year, before rebounding slightly.

The deal with Firth Rixson is strategically important for Alcoa. Firth Rixson is the largest jet engine ring manufacturer. It gets ~75% of its revenues from the aerospace industry. It adds new products and customers to Alcoa’s aerospace portfolio.

Alcoa is a global leader in aerospace fastening systems and jet engine airfoils. It develops airframe and engine applications. Alcoa has developed more than 90% of all aluminum aerospace alloys. It’s a leader in the aerospace industry. Every western commercial aircraft that’s flying today uses Alcoa fasteners.

Three factors are expected to impact aluminum companies going forward: aluminum capacities, financial demand, and auto companies.

Contrary to global expectations, China has increased its smelting capacities in the past decade. There are plenty of reasons behind this move.

With a mammoth 1.4 billion population and a growing economy, China currently dictates the global commodity market. Both iron and steel industries are reeling under the impact of China’s slowdown.

There were complaints from beverage companies like Coca-Cola (KO) and SABMiller because they weren’t able to meet the aluminum requirements for their bottling plants.

The aluminum industry has a value chain that consists of both upstream and downstream companies. Upstream companies are engaged in the mining and refining operations.

Aluminum is the most abundant metal found in the earth’s crust. It’s soft, lightweight, and durable in nature. Its low density and resistance to corrosion make it a very important metal that a lot of industries use.