How to Play the Aluminum Industry: A Comparative Analysis

(Continued from Prior Part)

Previously, we noted how different aluminum companies have secured power supply for their plants. Every strategy—whether going for captive power plants or buying power at market-based prices—has its own advantages and disadvantages. In this part, we’ll discuss how different power supply arrangements could impact aluminum producers.

As we noted previously, aluminum companies have strategically located their smelters near hydropower plants to secure electricity supply at cheaper rates. Rio Tinto (RIO) and Norsk Hydro (NHYDY) have substantial exposure to hydropower through their captive plants.

However, fossil fuel prices including coal, crude oil, and natural gas, have crashed over the last ten months. This has brought down the unit production costs for producers that generate electricity using these fuels.

Most aluminum companies don’t have significant direct exposure to fossil fuels. However, many Chinese aluminum producers have coal powered captive power plants. These companies have been able to take advantage of falling coal prices.

Some of Alcoa’s (AA) captive power plants use natural gas (UNG). According to Alcoa, it “procures natural gas on a competitive bid basis from a variety of sources” in its North American operations. The unit production costs for smelters using natural gas could fall more in the coming months looking at the falling natural gas prices. The above chart shows how spot natural gas prices have fallen over the last year.

As we discussed previously, Century Aluminum (CENX) doesn’t have captive power generation plants.

In the next part, we’ll explore how earnings vary across different primary aluminum producers.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - A Comparative Analysis of the Aluminum Industry
• Part 2 - Playing the Aluminum Industry: Key Investor Takeaways
• Part 3 - Why Earnings Sensitivity Varies among Aluminum Producers