Alcoa Q4 2017 Earnings Review: Higher Commodity Prices Supported Earnings Amid an Environment of Higher Input Costs

January 18th, 2018 by Trefis Team
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Alcoa Corporation (NYSE:AA) released its Q4 2017 earnings results and conducted a conference call with analysts on January 17. As anticipated, higher global aluminum and alumina prices drove a significant improvement in the company’s results. The prices of both these commodities have benefited from production curtailments in response to alarming levels of pollution in China. However, higher input costs weighed on Alcoa’s earnings, consequently resulting in missing market expectations.

We have summarized Alcoa’s Q4 earnings and detailed the major takeaways from the announcement in our interactive dashboard, the key parts of which are captured in the charts below.

Alumina Segment Remained a Major Highlight in Q4

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China’s industrial curtailment has been a pivotal factor in driving alumina prices in Q4. Although aluminum production cutbacks have not been as drastic as anticipated which weighed on aluminum prices in Q4, alumina cuts on the other hand remained substantial leading to a  widening demand-supply gap for the metal.

Alcoa states that the Chinese winter heating season in 2017 to 2018, experienced a total curtailment of 3.5 million tons of alumina refining capacity while aluminum smelting capacity were cut by 0.9 million tons. This led to a higher price realization for alumina and benefited the alumina business segment of the company. Third party alumina shipments represented 67% of the total production volume.

Alumina is used as a primary raw material in aluminum production. Higher alumina prices have thus resulted in a rise in raw material cost for the company coupled with higher-than-expected energy costs which weighed on earnings.

Despite missing market estimates by $.18/ share, we believe that the company displayed a strong performance throughout 2017, given its first full year of operation as an independent listed company. Going forward, the company’s objective of increasing its cash flow and initiating measures to increase shareholder returns would continue to support the growth in its stock price.

We have a $42 price estimate for Alcoa which is currently below the market price.

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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