The major US bank Citigroup sees aluminum facing the strongest supply shock in decades. Why Alcoa shares could benefit.
• Citigroup sees aluminum at $4,000 in the medium term
• Alcoa expected to benefit from “strongest market environment since the 1970s”
• Iran conflict curse and blessing: Alcoa’s Q1 figures miss expectations despite price increase for aluminum
When Iranian missiles damaged two large aluminum smelters in the Middle East at the end of March, it hit a market at its most vulnerable point. Around nine percent of global aluminum production comes from the region; almost all of the supply comes via the Strait of Hormuz and is dependent on imported aluminum and coal. The result: production losses, falling inventories and a scenario from which aluminum stocks like Alcoa should benefit.
Citigroup and UBS agree: aluminum price jump due to Iran war
Citigroup recently published one of the most striking aluminum forecasts in recent years: The major US bank expects a medium-term price jump on the London Metal Exchange (LME) to up to 4,000 US dollars per ton – which would eclipse the previous record from 2022 of around 3,850 US dollars. According to Citi, the Iran war created the fundamentally strongest market environment since the 1970s.
Alcoa shares are likely to benefit from this scenario, as Investors Daily Business reports, citing UBS. The smelter outages caused by the Middle East conflict would more than offset weak demand and lead to continued higher aluminum prices. In addition, solar power, electricity grids, electric vehicles and the construction of AI data centers would fuel demand.
Quarterly figures as a dampener: dark sides of the Middle East conflict
The fact that Alcoa has not yet benefited from this mixed situation is shown by the figures for the first quarter, in which the company missed expectations on both levels: Adjusted earnings per share were $1.40 compared to a FactSet consensus of $1.53, and sales were $3.19 billion instead of the expected $3.28 billion.
The reason for this lies in the shifting effects caused by the Middle East conflict itself: delivery delays in Australia as a result of the conflict and Hurricane Narelle reduced third-party alumina volumes by 31 percent, according to the company’s quarterly statement. The Alumina segment turned negative EBITDA of minus $40 million, after plus $664 million in the first quarter of the previous year.
At the same time, the realized aluminum price per ton rose to 4,209 US dollars, compared to 3,213 US dollars in the same period last year. In the short term, the conflict is putting pressure on Shipments and Alumina, while the actual aluminum price impulse is likely to lie ahead of Alcoa.
What Citigroup Forecast Means for Alcoa Stock
If Citi is correct with the deficit scenario, Alcoa should be one of the most direct beneficiaries – and a prompt entry could be worthwhile. The company is positioned along the entire value chain and is therefore directly linked to the LME price. FactSet analysts expect second-quarter earnings per share to rise 448 percent to $2.14, Investors Business Daily reports. Alcoa itself is promising favorable effects of around $55 million, supported by catch-up delivery volumes, higher product premiums and reduced production costs following the Smelter restart in San Ciprián.
However, two risks remain: free cash flow was negative in the first quarter at minus $298 million, and further disruptions to the aluminum supply chains due to the Middle East conflict would not be a one-off effect.
The second quarter will show whether the Citigroup thesis is reflected in Alcoa’s figures: Alcoa is expected to present its results in mid-July – then it will become clear whether the volumes caught up and the increased aluminum price together will deliver the operational turnaround.
Benedict Kurschat, editorial team at finanzen.net
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