Alcoa Analyst Says Alumina Oversupply Concerns Outweigh Short-Term Profit Opportunity

Although Alcoa Corp AA stands to benefit from the rally in alumina prices due to recent outages at two Chinese refineries, the impact is unlikely to last beyond the next few months — and the prospect of alumina oversupply in the Atlantic Basin is a meaningful cause for concern, according to Credit Suisse.

The Analyst

Curt Woodworth maintained a Neutral rating on Alcoa and reduced the price target from $27 to $24.

The Thesis

Two refineries in China have suspended production due to red mud leaks, which is estimated to result in around 210kt per month of losses over the next four to five months, Woodworth said in a Wednesday note. 

The situation does not have a material impact on the alumina market, and new refineries in China are ramping up to produce 3.4mt through the third quarter of this year, the analyst said. 

Although the outages may have caused a 20-percent hike in Chinese alumina prices — which should support prices in Australia — there are medium-term concerns related to alumina oversupply in the Atlantic Basin, he said. 

The new supply includes Alunorte, which should reach 80 percent capacity in two months; startup at EGA Al Taweelah, which is expected to ramp to 1.3mt by the second hald and to 2mt by the second half of 2020; and the restart at Alpart, Woodworth said. 

Credit Suisse reduced its EBITDA estimate for 2019 from $2 billion to to $1.7 billion.

Price Action

Alcoa shares were down more than 3 percent at $21.22 at the time of publication Wednesday. 

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Alcoa's Wagerup alumina refinery in Australia. Courtesy photo.