Understanding Alcoa’s 1Q17 Earnings through Rising US Premiums

Physical premiums

For aluminum producers, the all-in aluminum price consists of the aluminum price plus regional aluminum premiums. The premium is a surcharge that consumers must pay on top of prevailing prices in order to take immediate delivery of the metal from warehouses.

Aluminum premiums are a key indicator that investors in primary producers such as Century Aluminum (CENX), Norsk Hydro (NHYDY), and Rio Tinto (RIO) should track.

　Premiums have risen

Please note that unlike aluminum prices, which are decided through electronic trading, premiums are regional in nature and are settled between actual buyers and sellers. Some producers such as Alcoa (AA) see physical premiums as a better reflection of aluminum markets than LME (London Metal Exchange) aluminum prices (DBB).

The above graph shows the movement in spot US Midwest aluminum premiums, as reported by Metal Bulletin. Delivery premiums have shown strength in 2017. We’ve seen some upward traction in European delivery premiums as well, as the graph above shows.

Supporting earnings

Alcoa expects to generate adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) between $2.1 billion–$2.3 billion in fiscal 2017. This guidance assumes constant foreign currency exchange rates and physical aluminum premiums.

In arriving at this guidance, Alcoa assumed aluminum prices at $1,795 per metric ton and an API (alumina price index) of $355 per metric ton. Higher physical premiums should support Alcoa’s 1Q17 earnings.