Falling Aluminum, Alumina Prices Could Dent Alcoa¡¯s 4Q15 Earnings

Alcoa’s 4Q15 earnings

We’ve seen that aluminum prices are hovering around the $1,500 per metric ton level. Alcoa’s (AA) Primary Metals Segment, which produces primary aluminum, is impacted by the movement in aluminum prices. The segment sells aluminum with a 15-day lag to LME (London Metals Exchange) aluminum prices.

Spot aluminum prices have averaged $1,507 per metric ton between September 15 and December 15, 2015. This is almost $100 per metric ton lower than what aluminum averaged between June 15 and September 15, 2015. Falling aluminum prices could dent the 4Q15 earnings of Alcoa’s Primary Metals segment. The segment generated an ATOI (after tax operating income) of -$59 million in 3Q15. This performance could deteriorate further in 4Q15.

Meanwhile, the company’s Alumina segment could also put a hole in its 4Q15 earnings. Let’s see how.

Alumina segment

Alcoa’s Alumina segment generated an ATOI of $212 million in 3Q15. The segment recorded an average third-party selling price of $323 per metric ton in 3Q15. However, alumina prices have fallen steeply in the last couple of months, as can be seen in the graph above.

Benchmark alumina prices averaged $256 per metric ton between September and November 2015. In contrast, they averaged $310 per ton between July and September 2015. Note that Alcoa’s Alumina segment prices alumina with a one-month lag to the alumina price index.

Alcoa’s Alumina segment could report lower profitability in 4Q15 on the back of falling alumina prices. Rio Tinto (RIO) and Norsk Hydro (NHYDY) also sell alumina along with primary aluminum. These companies’ alumina operations could also be negatively impacted by falling alumina prices. However, Century Aluminum (CENX), which sources alumina from third parties, stands to gain from falling alumina prices.

Investors looking to diversify the risk of investing in a single security can also consider the SPDR S&P Global Natural Resources ETF (GNR). Almost a quarter of GNR’s holdings are invested in metal companies.

You can also read A Comparative Analysis of the Aluminum Industry to explore more about different companies in the aluminum value chain.

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