Why Alcoa’s Upstream Business Looks Well Placed in 2Q16
The Uncertain Road ahead for Alcoa and Arconic in 2Q16
Alcoa’s upstream business
Alcoa’s (AA) upstream business generated an ATOI (after-tax operating income) of $22 million in 1Q16 and contributed $185 million to Alcoa’s consolidated 1Q16 EBITDA (earnings before interest, taxes, depreciation, and amortization).
In 1Q16, the company’s upstream business accounted for 33% of Alcoa’s revenues. Its contribution to the company’s adjusted EBITDA was ~25%. But we could see Alcoa’s upstream earnings improve considerably in 2Q16.
Alcoa’s 2Q16
In its Primary Metals segment, Alcoa expects the ATOI to increase by $10 million in 2Q16, excluding any impact from pricing and currency. Aluminum prices have been quite strong in April. If the upward momentum sustains in May as well, the Primary Metals segment’s earnings could improve significantly in 2Q16.
Other commodity (DJP) producers including Century Aluminum (CENX), Rio Tinto (RIO), and Norsk Hydro (NHYDY) will also stand to gain if aluminum prices stay at their current levels.
Alumina segment
In Alcoa’s Alumina segment, though the production is expected to be flat in 2Q16 on a sequential basis, Alcoa expects the ATOI to increase by $15 million, excluding any impact from currency and metal prices.
It’s important to note that Alcoa prices 85% of its third-party alumina sales on the alumina price index, or API. API prices have risen sharply over the last month as the graph above shows. Furthermore, as API sales come with a one-month lag to spot prices, Alcoa will gain from higher alumina prices in March as well. The pricing lag should positively impact the Alumina segment in 2Q16 after hurting the company’s 1Q16 earnings.
In the next part of the series, we’ll see how Arconic performed in 1Q16 and what lies ahead for Alcoa’s downstream business in 2Q16.
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