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Alumina Comes off Record Highs: The Impact on Alcoa

Historically, alumina has been priced as a percentage of LME (London Metals Exchange) aluminum prices. However, in the past few years, buyers and sellers have been turning to the API (alumina price index) for alumina’s individual price discovery...

From: marketrealist.comDate: 2017-12-05 03:03:25Views: 185

Alumina

In aluminum’s value chain, bauxite is refined to aluminum oxide (alumina), and then alumina is processed into aluminum. Historically, alumina has been priced as a percentage of LME (London Metals Exchange) aluminum prices. However, in the past few years, buyers and sellers have been turning to the API (alumina price index) for alumina’s individual price discovery.

Volatility

Notably, the API has been quite volatile this year. In October, the API jumped to record highs on concerns over Chinese refinery curtailments. Higher alumina prices weren’t backed by a commensurate increase in aluminum prices. As a result, we saw some distortion in aluminum markets, and alumina as a percentage of aluminum rose sharply.

Generally, raw material and metal prices tend to balance themselves out. For instance, rising raw material prices lead to higher metal prices, and vice versa. We saw something similar last year, after higher coal prices pushed up alumina, and aluminum prices followed alumina higher.

In the current trend, alumina prices have come off their 2017 highs, and we also saw a yearly increase in Chinese alumina production in October. According to Platts, spot alumina prices in China fell by 450 Chinese yuan (~$69) per metric ton in November.

Impact

Falling alumina prices are negative for companies like Alcoa (AA) and Norsk Hydro (NHY) because they are long on alumina (RIO) (SOUHY). However, falling alumina prices is a welcome break for Century Aluminum (CENX), as the company buys alumina from third parties. Notably, higher alumina prices dented Century Aluminum’s 2Q17 earnings.

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