Aluminum prices have been on the decline over the past few months, amid improving supply trends, particularly in China, driven by more relaxed power restrictions and new capacity coming online. Moreover, reports of the resumption of smelting operations in China’s Yunnan province in late June have also been weighing on the aluminum market. While aluminum prices stood at about $2,400 in early April, they have declined since then to about $2,150 per ton currently. This is likely to impact the company’s revenues for the quarter. Separately, Alcoa has seen some delays in getting approvals for bauxite mining in Australia and this has resulted in the company mining for lower bauxite grades from previously approved areas. This could also impact results to an extent. That said, things could pick up a bit in Europe. While Alcoa was facing headwinds due to the high price of natural gas, this is likely to have moderated a bit over the last two months as energy prices cooled. Although Alcoa has not provided specific guidance for Q2 2023, it expects to ship between 2.5 and 2.6 million metric tons of aluminum in 2023, consistent with 2022.
Overall, we still remain positive on AA stock despite expectations of mixed results. Alcoa stock remains down almost 25% year-to-date and this could be a compelling entry point. Rising investments in the renewable energy sector including electric vehicles, charging infrastructure, and solar and wind power plants remain secular drivers for aluminum demand. We think that Alcoa has an edge over other aluminum producers given its strong balance sheet and also due to the fact that its facilities are largely based in the U.S., resulting in lower energy costs compared to European rivals. We value AA stock at $48 per share, which is well ahead of the current market price of about $34. See our analysis of Alcoa valuation for a closer look at what’s driving our price estimate for Alcoa and how Alcoa’s valuation compares with peers. Also, see our analysis of Alcoa Revenue for more details on how Alcoa’s revenues are expected to trend.
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