Alcoa 2015 Annual Report Download - page 53

The aluminum industry and aluminum end-use markets are highly cyclical and are influenced by a number of
factors, including global economic conditions.
The aluminum industry generally is highly cyclical, and Alcoa is subject to cyclical fluctuations in global economic
conditions and aluminum end-use markets. Alcoa sells many products to industries that are cyclical, such as the
commercial construction and transportation, automotive, and aerospace industries, and the demand for its products is
sensitive to, and quickly impacted by, demand for the finished goods manufactured by its customers in these industries,
which may change as a result of changes in the general U.S. or worldwide economy, currency exchange rates, energy
prices or other factors beyond its control.
The demand for aluminum is highly correlated to economic growth. For example, the European sovereign debt crisis
that began in late 2009 had an adverse effect on European demand for aluminum and aluminum products. The Chinese
market is a significant source of global demand for, and supply of, commodities, including aluminum. A sustained
slowdown in China’s economic growth and aluminum demand, or a significant slowdown in other markets, that is not
offset by decreases in supply or by increased aluminum demand in emerging economies, such as India, Brazil, and
several South East Asian countries, could have an adverse effect on the global supply and demand for aluminum and
aluminum prices.
While Alcoa believes that the long-term prospects for aluminum and aluminum products are positive, the Company is
unable to predict the future course of industry variables or the strength of the global economy and the effects of
government intervention. Negative economic conditions, such as a major economic downturn, a prolonged recovery
period, a downturn in the commodity sector, or disruptions in the financial markets, could have a material adverse
effect on Alcoa’s business, financial condition or results of operations.
Alcoa could be materially adversely affected by declines in aluminum prices, including global, regional and
product-specific prices.
The overall price of primary aluminum consists of several components: 1) the underlying base metal component, which
is typically based on quoted prices from the London Metal Exchange (LME); 2) the regional premium, which
comprises the incremental price over the base LME component that is associated with the physical delivery of metal to
a particular region (e.g., the Midwest premium for metal sold in the United States); and 3) the product premium, which
represents the incremental price for receiving physical metal in a particular shape (e.g., coil, billet, slab, rod, etc.) or
alloy. Each of the above three components has its own drivers of variability.
The LME price is typically driven by macroeconomic factors, global supply and demand of aluminum (including
expectations for growth and contraction and the level of global inventories), and financial investors. An imbalance in
global supply and demand of aluminum, such as decreasing demand without corresponding supply declines, could have
a negative impact on aluminum pricing. Speculative trading in aluminum and the influence of hedge funds and other
financial institutions participating in commodity markets have also increased in recent years, potentially contributing to
higher levels of price volatility. In 2015, the cash LME price of aluminum reached a high of $1,919 per metric ton and
a low of $1,424 per metric ton. High LME inventories, or the release of substantial inventories into the market, could
lead to a reduction in the price of aluminum. Declines in the LME price have had a negative impact on Alcoa’s results
of operations.
Additionally, Alcoa’s results could be adversely affected by decreases in regional premiums that participants in the
physical metal market pay for immediate delivery of aluminum. Regional premiums tend to vary based on the supply
of and demand for metal in a particular region and associated transportation costs. LME warehousing rules could cause
aluminum prices to decrease and surpluses have caused regional premiums to decrease, which would have a negative
impact on the Company’s results of operations.
Product premiums generally are a function of supply and demand for a given primary aluminum shape and alloy
combination in a particular region. A sustained weak LME aluminum pricing environment, deterioration in LME
aluminum prices, or a decrease in regional premiums or product premiums could have a material adverse effect on
Alcoa’s business, financial condition, and results of operations or cash flow.
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