Alcoa’s Primary Segment: Lower Transaction Prices Take a Toll
Alcoa’s 2Q15 Earnings and Aluminum Industry Outlook
Alcoa’s primary segment
The 2Q15 ATOI (after-tax operating income) of Alcoa’s (AA) primary segment declined 64% compared to the previous quarter. The segment, which produces primary aluminum, has been under pressure since all-in aluminum prices have corrected sharply. Though Alcoa has taken several steps—including closing high-cost facilities—they weren’t enough to compensate for lower aluminum prices.
Energy costs
The segment, however, benefits from lower energy prices. Please note that electricity costs make up almost a quarter of aluminum’s smelting cost. Electricity costs have come down somewhat as energy prices have fallen. However, owing to long-term supply agreements, aluminum companies haven’t been able to enjoy the full benefit of lower energy costs.
Alcoa (AA) produces 20% of its electricity requirements through captive power plants, while the figure is ~ 36% for Rio Tinto (RIO). Century Aluminum (CENX) sources almost all of its power requirements from third parties. It faces power supply issues at some of its plants.
Alumina segment
The chart above shows the 2Q15 financial performance of Alcoa’s alumina segment. The segment delivered the best first-half ATOI since 2007. The ATOI of the alumina segment increased more than five times compared to last year. However, compared to 1Q15, the ATOI declined ~2%.
Alcoa has moved to API (alumina price index) pricing for its alumina segment from aluminum-based pricing, which it used earlier. The company now ships three-quarters of its alumina at API and spot prices.
Please note that, currently, Alcoa forms 2.34% of the Materials Select Sector SPDR ETF (XLB) and 4.19% of the SPDR S&P Metals and Mining ETF (XME).
In the next part of this series, we’ll discuss the 2Q15 financial performance of Alcoa’s Global Rolled Products segment.
Browse this series on Market Realist: