Alcoa Posts 3Q Profit on Improving Market, Asset Sale

It is impossible to discuss aluminum outlook without touching upon China, as China produces and consumes roughly 30% of the world's aluminum. Chinese demand was an important force behind third-quarter price recoveries, as imports soared since March. However, the Chinese market had moved to a near-term surplus by the third quarter due to domestic smelter restarts and six months' worth of high imports. In fact, Chinese imports have been on a declining trend since July, and this contraction will likely ease the aluminum market further going into the fourth quarter. (In fact, spot aluminum prices have been correcting downward since mid-August.) Longer term, though, we think Chinese aluminum production will not threaten the global supply-demand balance, as the government refrains from giving out new smelter permits in the next three years and will slowly curtail low-technology smelters. Therefore, we believe the worst is over for Alcoa, although recovery will most likely take a long time.

A bright spot within Alcoa's results is on the alumina side. Operating margins improved to 12% from the second quarter's negative 2%, due to better prices and lower costs. In September, Alcoa opened the Juruti bauxite mine in Brazil. This places Alcoa's upstream assets in the first quartile on the global production cost curve. The refinery expansion is on schedule for commissioning later this year. Bauxite mining and alumina refining are the more attractive businesses in the aluminum value chain, and we expect Alcoa to remain a viable low-cost competitor on the alumina side over the long run. We are keeping our fair value estimate unchanged.