Alumina and electricity are the two key inputs that go into aluminium production which also play a very significant role in determining the price of aluminium.
Integrated aluminium producers like Alcoa, Norsk Hydro and Rio Tinto (RIO) have both alumina refining as well as aluminium smelting operations. Alumina prices were strong last year driven by capacity curtailments in China and higher thermal coal prices and high demand in China. Alcoa’s alumina segment posted a sharp increase in profitability due to higher alumina prices.
{alcircleadd}However, API prices (alumina price index) have fallen drastically in 2017. This could be a concern for Alcoa as lower alumina prices would have a negative impact on the profitability of its alumina operations. Secondly, low alumina prices could also bring down aluminium prices bringing down profitability for entire upstream operations.
Smelters that buy alumina from third parties could increase their production volume to increase profitability. If alumina prices stay at lower levels for long, it could impact aluminium prices.
Alcoa plans to announce its second quarter 2017 financial results on Wednesday, July 19, 2017. Analysts expect the company to post adjusted EBITDA of $491 million in 2Q17 against $533 million in first quarter. While higher aluminium prices can boost Alcoa’s profitability, it could also be affected by lower alumina prices.
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With reference to alumina, Alcoa’s 2017 EBITDA is expected to rise or fall by $69 million for every $10-per-metric-ton increase or decrease in API (alumina price index).
To withstand the volatility in the commodity market, Alcoa has been working on its cost control initiatives, streamlining its operations in a productive way. So, higher productivity and cost control measures are expected to support Alcoa in beating analyst’s expectation to report an increase in earnings.
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