Alcoa Surprise Loss on Falling Aluminum Prices and Rising Costs

The largest US Aluminum producer Alcoa reported worse than expected third quarter earnings on Wednesday. $AA warned just five weeks ago it was squeezed by higher energy and raw material costs and restructuring charges. Throw in falling Aluminum prices and the squeeze impact was obviously more than warned. The company reported an adjusted loss of $60 million or 33 cents a share, missing the average estimate of 8 cents profit. Aluminum prices are down more than 20% this year and has the White House and the LME in line to ban Russian metals which would cause supply problems.

Alcoa Smelting

Alcoa Corp NYSE: AA Reported Earnings After Close Wednesday

($0.33) Missed $0.08 EPS AND $2.85 Billion missed $3.10 Billion Forecast in Revenue

Alcoa Q3 Earnings

  • Third-quarter loss of $746 million, after reporting a $337 million profit in the same period a year earlier.
  • Alcoa recorded a net loss of $4.17 per share which includes $652 million of restructuring charges related primarily to pension actions
  • Losses, adjusted for non-recurring costs, came to 33 cents per share which missed expectations for earnings of 8 cents per share via FactSet.
  • Revenue fell to $2.85 billion from $3.1 billion a year ago, missing FactSet analyst estimates of $2.955 billion.
  • Acted to mitigate the impact of high energy prices in Europe; curtailed one-third of the production capacity at the Lista smelter in Norway and reduced daily production rates at the San Ciprián refinery in Spain to lower natural gas use
  • Alumina third-party shipments decreased 8% sequentially primarily due to lower trading volumes and the decision to reduce production rates at the San Ciprián refinery in Spain.
  • Aluminum, total shipment volume decreased sequentially 8% due to the July curtailment of one of three operating potlines at the Warrick smelter in Indiana, and reduced trading opportunities in Europe given market uncertainty. Most of the volume reduction was commodity grade aluminum; shipments of value-add products were flat sequentially.
  • Generated $134 million in cash from operations
  • Repurchased $150 million of common stock and paid fourth consecutive cash dividend of $18 million
  • Finished the third quarter with a cash balance of $1.4 billion

Market Reaction

  • Shares of Alcoa After hours $34.47 −3.15 (- 8.37%) after already being down −2.10 (-5.28%) to $37.62 today.
  • AA at $37.62 was down -22.74 (-37.67%) year to date

Production

  • Alcoa produced 497,000 metric tons of aluminum, which was consistent with the prior quarter’s strong output.
  • Additional volume from the restarts at the Alumar smelter in Brazil and the Portland smelter in Australia offset the lower aluminum production at Warrick from the partial curtailment.
  • Alumina segment production decreased 4 percent to 3.1 million metric tons, primarily due to the lower output at the San Ciprián refinery.

A punt on Alcoa is basically a punt on aluminum.

Commodity aluminum prices are down around 20% over the past year. That’s a powerful headwind for Alcoa results. Lower aluminum prices are also a powerful headwind for the stock. Alcoa shares rose over 160% last year. Much of this growth could be attributed to those aluminum prices rising yr/yr and sequentially due to tight availability and a recovering global economy that saw a ramp-up in manufacturing. Then demand fell away, energy prices soared, and it was clear like the majority of commodities before the bubble popped in March and April after the war premium it was way overpriced on speculative fervor.

Aluminum needs solid demand, a continual relative tightness in supply to push aluminum prices higher. Alcoa in 2021 we posted their highest ever annual net income, rising aluminum higher. A punt on Alcoa is basically a punt on aluminum.

2022 Outlook

The Company expects total Aluminum segment shipments to remain unchanged from the prior projection, ranging between 2.5 and 2.6 million metric tons in 2022.

In Alumina, the Company has decreased its 2022 projection for shipments to range between 13.1 and 13.3 million metric tons, a reduction of 0.5 million metric tons from the prior projection primarily due to the reduced production at the San Ciprián refinery and lower shipments from the Australian refineries.

In Bauxite, the Company has decreased its 2022 projection for annual bauxite shipments to range between 43.0 and 44.0 million dry metric tons, a decrease of 1 million dry metric tons from the prior projection due to lower demand from the Australian refineries.

For the fourth quarter of 2022, Alcoa expects higher sequential profitability in the Bauxite segment with increased third-party shipments.

Demand for aluminum products is driven by strong construction and housing markets, rising new electric vehicle production, and government sponsored infrastructure projects. We have seen aluminum inventories higher lately with moves from China in particular, that said they remain at historically low levels.

China diverted production to reduce carbon emissions and to reduce energy consumption from the trade war with Australia and freezing temperatures. Everything being equal a favorable supply and demand environment gives a positive outlook for Alcoa. Since then, we have seen housing markets hit walls as mortgage rates soar. The major risk is market risk, we saw that with aluminum sell off and equities sell off heavily since January with geopolitical and monetary policy risks threatening.

Aluminum Prices

The base metal index fell by 5.3% m-o-m, erasing the previous month’s gains. Prices of all of the index
components fell m-o-m except nickel. Weak manufacturing data from China and Europe remained a drag on the index (Purchasing Managers’ Index below 50 in both regions). High-energy prices continued to weigh on smelters in Europe, while the recent wave of monetary and fiscal support from the government of China has had a limited impact. Despite an increase in the production of metals, demand remains subdued amid ongoing property and construction challenges. Y-o-y, the index is down by 15.6%.

Aluminium prices declined by 8.3% m-o-m. According to data from the London Metal Exchange (LME),
aluminium inventories rose by 18.4% m-o-m, driven mainly by increased exports from China. The decline is more reflective of the declining demand in China (hence increased exports) amid limited upside impact on demand from the recent fiscal and monetary economic stimulus. Y-o-y, prices are down by 18.2%.

OPEC MOMR October 2022
via OPEC MOMR Oct 2022

The risk with commodity companies is they are highly exposed to the cyclicality of its end markets. These industries are undergoing a robust turbulence, which clearly hurts AA while aluminum prices remain offered. 

About Alcoa

Alcoa is a global industry leader in the production of bauxite, alumina and aluminum, a position enhanced by a portfolio of value-added cast products and select energy assets. Since developing the aluminum industry more than 130 years ago, Alcoa has built a legacy of breakthrough innovations and best practices that have led to efficiency, safety, sustainability and stronger communities wherever we operate.

Source: Alcoa

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