Alcoa Q3 2017 Earnings Review: Favorable Environment for Metal Prices Drives Earnings

by Trefis Team
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Favorable aluminum and alumina prices boosted Alcoa‘s (NYSE:AA) Q3 2017 results by adding an additional $52 million to its revenue. In addition to that, the increase in volume shipments of Aluminum and Bauxite have also contributed an additional $21 million to Alcoa’s Q3 results. ((Aloca Q3 2017 Earnings transcript, Seeking Alpha))

Aluminum has seen an elevated level of pricing due to a combination of demand and supply related factors. The world’s largest aluminum producer, China, has significantly cut down on its production due to the curtailments implemented in the economy to cope with pollution. Several illegal plants operating without permits have been forced to shut down and the government has instructed capacity idling to control smog ahead of the upcoming winter months. [1] Alcoa expects global aluminum supply to be cut down by approximately 7.6 million metric tons annually as a result of these curtailments.   ((Aloca Q3 2017 Earnings transcript, Seeking Alpha)) The threat of increased curtailments have, in turn, alarmed Chinese aluminum producers, making them stock large quantities of alumina to support future aluminum production in an environment of high prices. This move has led to a spike in Alumina prices. [2]

On the demand side however, steady growth in real estate and the automobile sector in China has resulted in an annual increase in demand for aluminum by 9.6% in H1 2017. [3]

LME Aluminum Prices, Source: LME Website

On the basis of improved market pricing of aluminum, Alcoa has revised their EBITDA outlook for 2017 to $2.4 billion, increasing roughly by an average of 11% from its last quarter estimates. Although an official statement on Chinese winter curtailment is yet to be released, we would be keeping a close watch on the numbers as it will have a crucial impact on global aluminum prices.

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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. Aluminum surges as winter comes early for Chinese smelters, Reuters []
  2. China spot alumina at 9-year high; firms further to Yuan 3,290/mt, S&P Global Platts []
  3. China’s H1 aluminum demand rises 9.6% on year to 17.5 mil mt: Antaike, S&P Platts) With the increasing popularity of electric vehicles and growth in demand for ultra high voltage electrical appliances, Alcoa has revised its outlook for global aluminum demand by 25 basis points in the range of 5%-5.5%. ((Aloca Q3 2017 Earnings transcript, Seeking Alpha []
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