After More Than Doubling In 2 Years, Alcoa Could See Alumina Revenues Drop 22% In 2019

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After its split to form two separate entities – Alcoa and Arconic – in 2016, despite operating in a highly volatile industry, Alcoa (NYSE: AA) successfully added about $3 billion in revenue to its alumina business, increasing the segment revenue base from $2.2 billion in 2016 to $5.2 billion in 2018. However, excess alumina supply, decreasing demand from downstream smelters, and a projected slowdown in global economic and manufacturing activity, is expected to adversely affect alumina revenues in 2019. Trefis estimates Alcoa’s alumina revenue to decrease by 21.6%, from $5.2 billion in 2018 to $4.1 billion in 2019, driven by marginally lower shipments and a sharp drop in global alumina price levels.

You can view the Trefis interactive dashboard – Why Alcoa Is Set To Lose Over $1.1 Billion In Alumina Revenue? – to better understand the factors leading to a revenue drop. In addition, here is more Materials data.

Alcoa’s Alumina Division Overview

What is on Offer?

The Alumina segment consists of Alcoa’s worldwide alumina system, including the mining of bauxite, which is then refined into alumina.

Customers?

The majority of Alumina is shipped to third-party aluminum smelting players or is sold to customers that process it into chemical products. As of 2018, about 29% of the alumina is used internally in the downstream division of primary metals.

Competition?

Alcoa’s alumina division faces intense competition from major players such as Rio Tinto, Rusal, BHP Billiton, and Chalco.

A) Alumina Shipments

  • Shipments increased by 0.2 million metric tons (mmt) between 2016 and 2018, led by higher production and inventory off-loading to take advantage of higher prices.
  • However, with a large number of aluminum smelters globally, mainly in China, cutting down on capacity on the back of lower aluminum demand due to concerns about economic slowdown, alumina demand has decreased in 2019.
  • This is expected to lead to a 0.2 mmt drop in shipments to about 9.1 mmt in 2019, marking a decline of 2% in shipments.

B) Pricing

  • Price saw a sharp increase in 2017 and 2018, led by higher demand from aluminum smelters.
  • The sanctions placed on Rusal (world’s largest aluminum player outside China) had sent alumina and aluminum prices soaring in 2018.
  • However, with the lifting of sanctions in January 2019, aluminum prices dropped, thus shrinking margins for smelters.
  • As per data with the International Aluminum Institute, global alumina production increased by 2.01 million metric tons for the period Jan-Aug 2019 compared to the corresponding period of 2018.
  • During the same time, global primary aluminum production (which assesses alumina demand) decreased by 0.26 million metric tons, indicating that the demand-supply gap is widening, with alumina increasingly being in surplus.
  • With many players cutting smelting capacity, and in line with the first 8 months of 2019, global primary aluminum production (i.e. alumina demand) is set to decrease by 0.6 mmt for the year. At the same time, alumina production (which saw a drop in 2018 due to sanctions on Rusal) is expected to improve by 2.1 mmt.
  • Thus, with smelting capacity being cut, alumina has been in surplus in 2019, leading to global prices heading south with low demand.
  • Price realization per ton of alumina sold by Alcoa is set to decline from $558 in 2018 to $447 in 2019, marking a decline of 20%.

C) Total Alumina Revenue

Thus, Alcoa’s alumina revenue is likely to decrease by 22% to $4.1 billion in 2019, driven by a 20% drop in price realization and a 2% decrease in shipments. Alumina’s contribution in Alcoa’s total revenues is expected to decline from 38.6% in 2018 to about 37% in 2019. To see how the Aluminum and Bauxite divisions are performing, please refer to the Trefis analysis – Alcoa Revenues: How Does Alcoa Make Money?

As per Alcoa Valuation by Trefis, we have a price estimate of $25 per share for Alcoa’s stock.

 

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