Alcoa posted lower sales in the first quarter, as the Iran conflict created a major snag in the alumina supply chain.
The producer of alumina, aluminum and bauxite said Thursday it had to reroute millions of tons of refining capacity from the Middle East, which is the biggest alumina importing region in the world.
The alumina industry's reliance on the Strait of Hormuz, through which maritime traffic was mostly blocked during much of the first quarter, put pressure on alumina prices and demand, Chief Executive Bill Oplinger said.
Roughly 8.8 million tons of alumina and 6 million tons of bauxite move through the Strait of Hormuz each year. As a result of the conflict, more than 2.5 million tons of annual smelting capacity and nearly 2 million tons of refining capacity are offline year to date, Oplinger said.
"That's a meaningful disruption to the global system," he said.
Revenue fell 5% to $3.19 billion in the quarter ended March 31. Analysts surveyed by FactSet forecast revenue of $3.28 billion.
Shares of Alcoa declined 3.6% to $67.84 in after-hours trading Thursday.
The company has rerouted much of its Middle East-bound cargo to China, which is creating an influx of supply in the country, Oplinger said. Alcoa expects to see pressure on prices related to the oversupply, along with weaker demand from Middle East smelters, through the first half of the year.
Profit fell to $425 million, or $1.60 a share, from $548 million, or $2.07 a share, a year earlier. Stripping out certain one-time items, adjusted per-share earnings were $1.40, behind the $1.53 anticipated by analysts, according to FactSet.
One bright spot is that aluminum prices are rising due to tight inventories and supply disruptions, with the Middle East conflict potentially constraining supply even more, Oplinger said.
While the rising cost of oil and raw materials are making production more expensive, Alcoa said the higher aluminum prices are helping to insulate the business.
Prices were already rising before the conflict due to constrained supply, Oplinger said. Because the Middle East is one of the biggest aluminum exporting regions in the world, the conflict there is pushing prices up even further across Europe, North America and Asia.
Alumina shipments dropped 31% sequentially, while aluminum shipments fell 8%. The lower aluminum shipments were also related to inventory repositioning, Alcoa said.
In the current second quarter, the company expects the conflict in Iran to contribute to an unfavorable impact of $15 million on its adjusted earnings before interest, taxes, depreciation and amortization in its alumina segment.
The projected costs are related to lower price and volumes from bauxite offtake agreements and higher energy prices.
In its aluminum segment, Alcoa expects a favorable impact of $55 million in adjusted Ebitda due to several factors, including inventory repositioning in the first quarter, higher shipments and the completion of the San Ciprián smelter restart earlier in April.
Alcoa affirmed its full-year outlook for production and shipments of both alumina and aluminum.
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