Lower Aluminum Prices Dint Alcoa¡¯s 1Q 2015 Earnings

Lower aluminum prices

Previously, we discussed how moving to the API (alumina price index) boosted earnings in Alcoa’s (AA) alumina segment. Its primary metals segment, which produces aluminum, doesn’t have that advantage. Aluminum prices on the LME (London Metal Exchange) act as a reference point for pricing aluminum. Alcoa prices its aluminum with a 15-day lag to LME aluminum prices. Its 1Q earnings lost $84 million due to a decline in aluminum prices.

1Q earnings

Alcoa’s primary metals segment after-tax operating income was $187 million in 1Q, down 30% over 4Q 2014. The segment posted a loss of $15 million in 1Q 2014. Along with lower aluminum prices, this segment was hit by lower energy sales in Alcoa’s Brazilian operations.

Alcoa has curtailed all of its smelting capacity in Brazil (EWZ) and sells the electricity from its captive power plants in open markets. The Brazilian government has capped the electricity price at 388 Brazilian real, or BRL, per megawatt-hour. The earlier cap was 822 BRL. Lower energy prices negatively impacted Alcoa’s 1Q earnings.

Alcoa sold its stake in the Mt. Holly smelter to Century Aluminum (CENX) last year. Its aluminum production in 1Q came down as a result of this action.

Outlook

Aluminum premiums have corrected sharply over the last couple of months. This can be seen in the previous chart. Alcoa expects lower aluminum premiums to have a negative impact of $65 million on its primary metals segment 2Q earnings. Companies such as Vale (VALE) and BHP Billiton (BHP) are also negatively impacted by lower physical aluminum premiums. BHP currently forms 6.9% of the iShares Global Materials ETF (MXI).

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