How Long Can Cost Push Inflation Support Alcoa and Aluminum?

Aluminum’s value chain

Aluminum’s value chain starts with the mining of bauxite, one of the most abundant metals in the earth’s crust. Due to bauxite’s many impurities, it must be refined to produce alumina, which is then processed to produce raw aluminum.

Companies such as Rio Tinto (RIO), Norsk Hydro (NHYDY), and Alcoa (AA) have alumina refining and aluminum smelting operations. However, Century Aluminum (CENX) produces aluminum by sourcing alumina from outside parties.

Aluminum producers (XLB) that also produce alumina stand to benefit from higher alumina prices. Alcoa was the top alumina producer last year, with a strong first-quarter cost position on the global cost curve.

Alumina has been strong

Alumina prices have shown strength over the last couple of months. Two key factors have driven alumina’s price action: First, alumina seems headed for a supply deficit this year following Chinese curtailments. Second, higher coal prices are supporting alumina prices.

During Century Aluminum’s 3Q16 earnings call, its CEO, Mike Bless, said that economic factors didn’t support the initiation of new capacity in China. Bless pointed to rising alumina prices and higher coal and energy prices to substantiate his argument. 

UC RUSAL also sees limited additional restarts, as aluminum’s cost of production has risen due to higher alumina and coal prices.

Cost-push inflation

Remember that higher raw material prices have raised production costs for Chinese smelters, some of which rely on imported alumina and coal. As input costs have surged, aluminum prices have gotten a natural boost. Now, the question is how far cost push inflation can support aluminum prices. We’ll explore this in the next part of the series.