Alcoa’s Q1 2017 Earnings Review: Favorable Pricing Environment Translates Into Earnings Growth

April 25th, 2017 by Trefis Team
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Alcoa released its Q1 2017 earnings result on April 24. [1] As expected, the company reported a substantial improvement in its Q1 earnings driven by an improved pricing environment.

AA Q1 2017 Earnings Review

Aluminum and alumina prices have risen substantially over the past few months. The following chart illustrates the trajectory of aluminum prices over the past year.

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Aluminum Prices Apr 2016-Apr 2017

Source: LME

A combination of demand and supply side factors have boosted aluminum prices over the past few months. Since aluminum is a metal that is extensively used in industrial applications, the demand for the metal is strongly correlated with economic growth. Accelerating economic growth in the U.S. has raised the demand outlook for aluminum from the country. In addition, the federal government’s planned $1 trillion overhaul of domestic infrastructure is expected to boost U.S. demand for aluminum over the coming years. [2] While slowing economic growth in China, the world’s largest consumer of the metal, raised concerns over Chinese demand for the commodity, the Chinese government’s fiscal stimulus targeting the infrastructure sector will provide a fillip to the demand for the commodity in the near term. [3] In addition, the Chinese government’s plans for shutting down excess aluminum smelting capacity in order to tackle excess production and pollution is likely to translate into a more favorable demand-supply equation, which has also contributed to the rise in prices. [4]

The aforementioned factors taken together are likely to keep aluminum prices elevated over the rest of the year. In addition, since alumina is largely used in the production of aluminum, robust demand for aluminum is likely to translate into elevated demand and prices for alumina as well. With Alcoa having shut down high-cost smelting and refining capacity over the past couple of years, the company is well placed to benefit from the favorable pricing environment in the coming quarters.

Have more questions about Alcoa? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alcoa

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Notes:

  1. Alcoa Corporation Reports First Quarter 2017 Results, Alcoa News Release [↩]
  2. Trump Begins to Map Out $1 Trillion Infrastructure Plan, Wall Street Journal [↩]
  3. China Blowing Major Bubbles In 2017, Forbes [↩]
  4. Aluminium emerges as top performing industrial metal in 2017, Financial Times [↩]