Alcoa has alumina win but headwinds to grow

Alumina chief executive Peter Wasow said industry conditions remained difficult in the first quarter as oversupply continued to depress alumina prices, despite “robust” growth in global demand and a strong result for joint venture partner Alcoa’s alumina unit.

Alcoa posted a 59 per cent increase in after tax operating income for its alumina operations year-on-year from $58 million to $92 million for the quarter.

But market conditions have since deteriorated and analysts fear momentum is set to stall for Aloca’s Australian and broader alumina operations.

Mr Wasow put the increases in margins for alumina down to a lower Australian dollar, better productivity and “cost control”. Oversupply in the Atlantic market had hampered the industry, despite the Chinese continuing to reduce refining capacity for the commodity, he said.

“In China, there have been further curtailments in refining capacity in the Shangdong region due to uncertainty over bauxite supply and cost, while inland refiners continue to satisfy domestic Chinese demand,” Mr Wasow said.

He noted global demand for aluminium continued to outpace gross domestic product.

Alcoa is set to shutter its 190,000 metric tonne Point Henry aluminum smelter, near Geelong, by August this year, as part of an aggressive cost-cutting program.

The hit to commodity prices is pushing Alcoa away from smelting, with the group also closing a New York smelter and slashing capacity in others in Brazil. Its focus is increasingly on upstream operations.

Alumina Ltd shares were up 1.99 per cent to $1.28 at 11.15am, after the release of Aloca’s first-quarter results Wednesday morning.

Alumina owns 40 per cent of Alcoa World Alumina & Chemicals, while Alcoa owns the 60 per cent balance. AWAC produced 4 million tonnes in the March quarter.

UBS resources analyst Glyn Lawcock says Aloca’s solid firs-quarter result for alumina – which was in line with expectations – was driven by a higher spot alumina price, an increase in volumes sold into the spot market, from 53 per cent to 61 per cent, and a weaker Australian dollar.

“All those factors increased margins by about $6 a tonne, which after one-off charges translated to $3 a tonne,” Mr Lawcock said.

“But they are facing significant headwinds going into Q2 [the second quarter], just the rise in the Australian dollar to 93¢ [on Thursday] wipes $4 off their margins.”