Alcoa Earnings Preview: Strong Environment for Aluminum Prices to Drive Results

by Trefis Team
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Alcoa [1] will release its Q3 2017 earnings result and conduct a conference call with analysts on Oct 18.  [2] As Alcoa spun off its value-added businesses into a separate company towards the end of last year, we cannot compare the company’s result in Q3 2017 with that in the corresponding period of last year.

The company had reported an 8% Q2 2017 sequential growth in revenue mainly due to a favorable aluminum pricing environment which was partially offset by weak alumina prices. However, we expect the company to report strong Q3 earnings driven by a favorable pricing environment of both aluminum and alumina. 

LME Aluminum Prices, Source: LME Website

Aluminum prices have risen considerably in the past quarter mainly due to the recent curtailments implemented in the Chinese economy in order to cope with pollution. Strict environmental policies implemented by the Chinese government has led to a forced shut down of several illegal plants operating without permits in the country along with capacity idling during the upcoming winter months with an intention to control smog. [3] These curtailments have significantly reduced the total output of the world’s largest aluminum producer. China, which contributes more than 50% of global aluminum output, has reduced its total production roughly by 10% since the beginning of the year. [4] On the demand side, however, conditions have remained quite stable which has resulted in an increase in prices of the industrial metal.

Additionally, with the ongoing threat of a further capacity cut by the Chinese government, aluminum producers in the Chinese economy have started stocking large quantities of alumina to support future aluminum production in an environment of high prices. This move by major Chinese producers has, in turn, led to a spike in Alumina prices. [5]

This price surge of the two major revenue drivers of Alcoa, should result in strong earnings for the company.

Additionally, the company is to report an after tax benefit of $25 million this quarter to reverse the accruals from the previous halt of its aluminum smelter at Warrick Operations in Evansville, Indiana. There would also be additional restart expenses incurred by the company of approximately $30-35 million which would be spread across Q3 and Q4 of 2017. [6]

The following table summaries our expectation from the upcoming earnings release:

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 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. NYSE::AA []
  2. Alcoa schedules third quarter 2017 earnings release and conference call, Alcoa website []
  3. Aluminum surges as winter comes early for Chinese smelters, Reuters []
  4. Primary Aluminum Production, International Aluminum Institute []
  5. China spot alumina at 9-year high; firms further to Yuan 3,290/mt, S&P Global Platts []
  6. Q2 2017 Earning Presentation, Alcoa website []
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