Alcoa Corporation (AA) Earnings Call Transcript & Summary

Sure. And taking a step back, when I think about the market, I look at 2023 particularly as balanced on the knife's edge. We're at a point where supply is matching up pretty well with demand. And so when we have occurrences, and Yunnan is an example, where there simply isn't enough hydro energy to be able -- for them to be able to continue to operate their smelters. And because it's of 5 million tons, 2 million tons are already curtailed. It demonstrates that supply is challenging. Now we also have challenges on demand. And as I said in my opening comments, aluminum is completely tied to the economic cycle. So when we look at the uncertainty around what's happening in North American GDP or in Chinese GDP, how quickly they're recovering from the COVID shutdowns, all that will impact how much aluminum is consumed. And so I look at the supply challenges that we're seeing, and we're not seeing a lot of new capacity come online. And in fact, China is starting to bump up against their 45 million-ton per year cap, and I'll talk about that in a second. And I then match that into what is an uncertain demand environment, continued growth, but it's relatively slow growth. When you bring those 2 things together, it can either mean a small deficit or a small surplus. And so this year will be sort of a year of treading waters, maybe not the right word, but we've seen pricing sort of come up and down. And we've not seen sort of the longer-term dynamics in supply-demand reassert themselves yet. And we've certainly not seen where will Yunnan take us. And we've heard both sides of that argument that the drought will continue for longer or that it's, in fact, raining torrents right now, and it will be solved. I like the drought continues for a longer option just from an aluminum perspective as a producer. But in the end, I think those things will even out, we'll continue to see demand grow. All this connects to a medium to long term where you look at aluminum and you say, "Hey, it's connected to the economic cycle. It's embedded in the cars of the future, whether they're electric vehicles or combustion technology. It's connected to all these renewables." And so the fact is aluminum will grow in the future. And there simply aren't enough projects, new supply projects that are available as China gets to this 45 million tons per year cap. And the fact is, they've not deviated from the need for an operating permit, and now you need to buy the operating permit from an already existing smelter rather than just ask for it from the government. That says that, that cap is real. And so China will eventually either only convert old technology to new technology, and we've seen that in Yunnan as an example, or they're going to start looking outside of China. And when they go outside of China, they face the same barriers that we have. Where do you find the renewable energy because no one really wants to run a coal-fired power plant connected to a smelter today. And then how do you build the infrastructure associated? So a lot of the advantages the Chinese have had inside of China, and they're very efficient, very good technology, but they had a lot of infrastructure provided, that doesn't -- it doesn't hold true outside of China. And so it's the same game that we've played for a number of decades and it's challenging. So when I look at continued growth, and I match that up against challenged supply, it tells me aluminum has a really bright future, because it's part of a decarbonized world. We have to move pretty quickly towards decarbonized energy sources and these new breakthrough technologies. And I think we can go after that challenge, but I also see that aluminum is going to be a great commodity to be for the future.

I wanted to do a follow-up on a couple of points there and then ask you on the demand side. So are you seeing any risks? So like I mean, in the past, we've seen China just shift back to coal. And so I mean, Yunnan is an important supplying province but we've seen other risks, too, for example, Russian supply going to certain member states or certain partner states. Have you seen any indication of semis exports from China at all? And then just a follow -- just to round that back up because you touched on it a bit, but just on the demand side. Just wanted to get your thoughts on demand in the U.S. And I think the premium -- the Midwest premium has weakened somewhat. And I'd just love to hear your thoughts there on where you're seeing strength and where you're seeing weakness in which end markets. That's the sort of lot of it.

That's a lot of questions. So I'll try to remember that, but you'll remind me, just in case I don't get there. So starting off in China. In the end, I think it's a clear trend to move away from coal and into hydro into renewables. That doesn't mean there won't be hitches along the way and the challenges that they're facing in Yunnan, there is no good way to curtail a smelter and be able to bring it back up again. So then the decision becomes how quickly -- how long will we have power available? Because if it's the same drought next year, then running a plant for 6 months is a waste of -- it's a waste of investment and waste of money because it costs tens of millions to bring up a plant of that size, even with the Chinese that are just really good at being able to use their technology efficiently. So I look at it and you could have some additional production of coal-fired power. That's part -- it's a big part of the market today. It's why you look at that carbon curve. The carbon embedded inside of aluminum curve in that big upper half, it's all Chinese for the most part, not completely, but much of it. And so that will continue. It's still an important part of the market. You see that in India and some other places. So that's sort of the first point. On Russian metal. So Russia continues to produce as they did prior to the war. We've seen a lot of our customers move away from the willingness to purchase Russian metal. Our argument with the U.S. government, our argument with European governments is that it makes sense to sanction. Right now, that sanctions are almost de facto for most consumers and most customers, but until you declare it, for example, LME has not stopped Russian metal from coming into the warehouses. And looking at the latest set of figures, 52% of the material in LME warehouses is now Russian, the remainder, mostly Indian metal. Many of you probably saw the headlines overnight that it sounds like the Indian metals going out, Russian metals coming in. And so at some point, all you have left in the LME warehouses is going to be Russian metal. And that's going to then change the dynamics of how -- what's the value of LME because that LME price point will become a discounted price for Russian metal and on top of that, you'll have to build in larger premiums to reflect the supply demand that's happening inside of North America and inside of Europe. And so it sort of erodes the basis for pricing by using the London Metal Exchange. I don't think there's a good different pathway. But in the end, I think the easiest way to solve this problem is by putting sanctions on Russian metal and simply recognizing the fact that no one is consuming this metal right now and it's going to warehouses. Use that to transition into your point about North American demand, and I'll sort of make it a little broader. Europe is probably better than what we expected. So our customers in Europe are more confident which means that they're buying with a little bit longer lead times, they're a little -- they feel that given where energy prices today, which still aren't great, but they're certainly much better than what they thought they would be, Europe is a bit stronger, particularly in things like packaging and automotive. When you look at North America, I'd say it's probably a little weaker. I think a little more uncertainty. I think the issues with the banks has pulled away a little bit of confidence. The questions about what does the economy look like for the next 6 to 9 months. And so North America is a little bit weaker, but still growing. So it's sort of -- I've been calling it a couple of times in the meetings, ho-hum, right? It's neither really good, and it's certainly not really bad. You're seeing Midwest premiums continue to be relatively strong. It attracts the imports. To me, it's moving sort of as we expected it, but I keep looking towards that medium to long term when we see demand continue to pick up again, and we see the economy move past some of this uncertainty.

Okay. Fantastic. I wanted to canvass the audience to see if there were any questions. If you have any, just please put up your hand. I see there is 1 question, so we'll get a mic to you in just one moment.

The global -- the visible inventories have been coming down for quite a while. They continue to come down, yet a lot of the remaining inventory is Russian inventory. So why aren't the physical premiums going up? And if they are not going up now, when should they start going up based on the current trends?

So all your points are correct. We've continued to see pretty low levels of physical inventory in all markets. I think you were starting to see physical inventories come up in Asia. But again, it's all Russian metals. So that metal doesn't necessarily have an easy home. So I look at it as the -- those lower physical inventories will be the catalyst for quicker action on pricing once you get into a deficit environment, particularly. So I think where we find ourselves today is that supply and demand are pretty balanced. So you're not necessarily drawing from inventories because you typically have metal available. Russian metal is a little bit of a variation and a unique circumstance. But for the most part, you're pretty well balanced. And so for example, physical premium, the Midwest premium in North America jumped up, attracted in imports coming in from Middle East and other places, and then came back down again once those imports have come in. So it tends to be reacting to the availability and the importation of metal as it should. So I look at it, those low inventory levels will really help price to react very quickly as we start to see some of these medium-term characteristics play out. As demand starts to recover, as the economy recovers, aluminum demand starts to recover. And in the end, you're simply not going to have the supply response that can ensure that you've got enough aluminum and that's what's going to then go back to the inventories, and they're not going to be there, which should help support prices for the medium term. Again, we need to get through the uncertainty that we have now. We need to see that demand reestablish itself, and then I think we should start to see some of that price reaction. Thank you for the question.

Yes, thank you for the question. Thank you for being here today and answering that question, and thank you, everybody, for being here. And please help me thank Roy for his time today.

Thank you very much.