Falling alumina prices may pose a challenge to Alcoa, say analysts

Leading aluminium producer Alcoa sees in alumina prices a brewing concern for its alumina and aluminium business divisions. The alumina price index (API), which helps in alumina’s price discovery, has fallen significantly and this is likely to hit the company’s profitability in alumina operations.

Price of alumina, a key raw material for aluminium smelting, is factored in aluminium prices just like the power cost which is a major cost component of the metal. When alumina becomes cheap, it drags down the price of aluminium. Till now, falling alumina prices have not had any major impact on aluminium prices but if alumina prices continue to drop further, it could impact aluminium prices.

For integrated aluminium producers like Alcoa, those who have alumina upstream operations, downhill price trend of the mineral could pose as a two-pronged challenge.  On one hand, their profitability of alumina business gets hit badly and secondly, they lose margins on their final primary metal products.

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Alcoa had gained from higher alumina prices when market sentiments were bullish in China due to capacity curtailments and higher thermal coal prices. The company had posted a sharp rise in profitability in its Alumina segment.

However, falling alumina prices coupled with rising geopolitical tensions and concerns about capacity curtailments in China are likely to dampen the market sentiments in the short term; and this could result in declines in profitability in Alcoa’s alumina and aluminium business segments, observes Market Realist.