Will Alcoa’s Stock Price Continue To Be Strong?

by Trefis Team
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Alcoa‘s (NYSE: AA) stock price has been receiving considerable momentum since the imposition of trade sanctions by the U.S. against Russia’s aluminum giant, Rusal. Although a great degree of uncertainty still prevails with respect to the U.S.’s final decision against Rusal, a considerable extent of aluminum supply deficit is expected to provide the necessary boost to aluminum prices in the near term and support Alcoa’s stock price, even if U.S. sanctions against Russia do not materialize. In this note, we would like to highlight the factors which are expected to remain beneficial for Alcoa in the near term and support its stock momentum.

Global Aluminum & Alumina Deficit

Alcoa’s latest earnings release guided towards a supply-side deficit for both the aluminum and alumina market in 2018 while demand is expected to remain strong. This expectation has been built without accounting for the impact of the latest development with respect to Rusal. Global alumina deficit for the year is primarily anticipated to be driven by third-party supply disruptions with a 50% supply cut expected from the world’s largest alumina refinery, Alunorte, to comply with judicial orders and the reestablishment of China’s refinery curtailments during its 2018 winter season.

The aluminum deficit, on the other hand, is expected to be exacerbated by the global alumina supply deficits and similar aluminum production curtailments in China. Additionally, the 10% tariff imposition in the U.S. is expected to amplify the impact of the deficit in the U.S., in particular. The smelter restarts announced in the U.S. following the favorable market conditions are not expected to achieve full production until 2019, thus hindering supply growth in the aforementioned region.

Uncertainty With Respect To Rusal Sanctions

The U.S. government recently announced sanctions against the Russian giant, Rusal, barring them from international business. However, these sanctions were consequently eased with a possible hint of withdrawal given that Rusal’s majority owner, Deripaska, ceded control from the company. These major developments led to excessive growth and consequent decline in both, aluminum commodity and aluminum stock prices, making the market extremely uncertain.

Rusal accounted for 12% of U.S. aluminum demand in the previous year and hence a probable sanction would have serious long-term implications on the country’s overall market. Although it seems as if these sanctions are not likely to materialize given the current scenario, an atmosphere of uncertainty will continue to support aluminum prices and aluminum stocks until a final outcome is achieved.

Thus, on the basis of these favorable market developments, Alcoa had raised its 2018 EBITDA guidance by more than 30% (assuming mid-points) but also cautioned towards an unpredictable positive or a negative impact on the basis of future macroeconomic developments. Thus, Alcoa is expected to remain in the limelight throughout the year and is anticipated to gain continuous momentum until a final declaration about the U.S. sanctions is made by the U.S. government.

Our expectations with respect to the company’s 2018 performance have been highlighted in our interactive platform. In case you do not agree with our estimates, you can make changes to our assumptions by using the interactive dashboard.


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