Rising alumina prices give Alcoa a decent boost, but will it sustain?

Alumina prices have been rising globally over the last two months. In October, the prices rose rather steeply enticing integrated aluminium producers with alumina refining operations to gradually move to the alumina price index for pricing their products. Earlier, most standalone alumina companies and even aluminium companies would consider a percentage of aluminium prices to price their products. But now, they are making a shift to the alumina price index.

Alcoa, the newly formed upstream company formed from the erstwhile aluminium producer of the same name, is expected to deliver a strong near-term performance boosted by higher alumina prices, marked analysts at Market Realist.

The following graph shows the alumina price movement during October 2014 - October 2016:



Alcoa was the top alumina producer in 2015. The company held a strong cost position on the global cost curve in the first quarter of FY2015-16. However, Alcoa’s Alumina segment posted lower revenues in Q3 2016 compared to Q2 2016. The segment’s Q3 2016 revenue was negatively impacted by lower alumina prices. The Alumina segment reported a third-party realized price of $287/mt in Q3 2016, compared to $304/mt in Q2 2016.

Century Aluminum, which sources alumina from third parties, also reported rise in their unit production costs due to higher alumina prices.

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Notably, analysts believe it is bauxite not alumina that Alcoa should bank on for their long-term growth. Higher alumia prices, though giving a short-term boost, is unlikely to sustain in the long term.