Rio Tinto’s Aluminum Business Depends on This

Aluminum production

Rio Tinto’s (RIO) aluminum production was stable YoY (year-over-year) in 1H17 at 1.78 million tons. The strong production achieved at most smelters was offset by the partial curtailment at Rio’s Boyne Island smelter in Australia due to high power prices in 1H17.

While Rio’s alumina production was slightly lower in 1H17 YoY at 4.07 million tons, bauxite production was 4% higher YoY at 24.1 million tons. Rio expects its bauxite production to be between 48 million and 50 million tons for 2017. While it expects a range of 8.0 million–8.2 million tons for alumina, aluminum production is expected to come in between 3.5 million and 3.7 million tons.

　Average prices shoot up

Rio benefitted from higher aluminum prices in 1H17 in it did in 1H16. The LME (London Metal Exchange) aluminum prices were 22% higher YoY in 1H17 at $1,880 per ton. The market premia also increased in all the regions in the US (SPY) (SPX).

Rio received an average price of $2,151 per ton in 1H17, which was 19% higher YoY. This included premia for VAP (value-added products), which formed 57% of its primary metal produced.

Higher aluminum prices supported aluminum producers’ stock prices in 1H17. Century Aluminum (CENX) saw a rise of 82% in 1H17, making it one of the best-performing metal producers in the first half of 2017. Alcoa (AA) and Norsk Hydro (NHYDY) have also seen positive price actions.

Margins shooting up too

Higher realized prices led Rio to realize almost twice as many earnings in 1H17 than it realized 1H16. Its earnings for aluminum division totaled $759 million in 1H17.

Rio’s efforts at cost improvements, productivity enhancement, and higher volumes drove its EBITDA (earnings before interest, tax, depreciation, and amortization) margin to 35% in 1H17, up from 25% in 1H16.