JPMorgan Lowers Rating on Aluminum Stock Prior to Earnings Announcement

Alcoa Stock Downgraded by JPMorgan Ahead of Earnings Report

JPMorgan Analyst Downgrades Alcoa Stock

JPMorgan analyst Bill Peterson has downgraded Alcoa stock to neutral from overweight, and also lowered his price target from $54 to $36. This downgrade comes just before Alcoa's earnings report next week. Peterson cited weaker near-term fundamentals in the aluminum market and anticipated capacity restarts in China, which could lead to a slump in global aluminum prices. As a result, Peterson's new price target suggests that Alcoa shares could potentially fall by 1.9%.

Challenges in the Aluminum Market

Planned smelting capacity restarts in China, combined with restricted capacity due to low rainfall and hydro reserves, are expected to put pressure on global aluminum prices in the coming months. Additionally, the increase in Russian aluminum supply, despite customer preferences for metal from other countries, further adds to the supply-side pressure. Peterson also noted that the U.S. Midwest Premium is likely to worsen in the fourth quarter, and an oversupply of aluminum could lead to significant discounts. The analyst expressed little confidence in demand picking up before 2024.

Concerns for Alcoa's Future

Peterson highlighted the challenges Alcoa faces in ramping up capacity in the near future, given weak fundamentals and high energy and restart costs. Furthermore, the company may face difficulties in obtaining extensions for mining in Western Australia, due to growing dissatisfaction from local activists. The lower bauxite grade feed for refineries could also contribute to cost pressures for Alcoa in 2024.

Analyst's Preferred Picks in the Aluminum Space

Despite the downgrade for Alcoa, Peterson maintained his overweight rating for Constellium and a neutral rating for Kaiser. He considered Constellium as his preferred pick in the aluminum industry due to its discount compared to peers and the potential for capital returns next year. Overall, Peterson remained constructive on aluminum stocks in the long term. In conclusion, JPMorgan's downgrade of Alcoa stock reflects concerns about the weak fundamentals in the aluminum market, anticipated capacity restarts in China, and potential challenges for Alcoa in the near future. Peterson maintained his positive view on the aluminum industry as a whole, but urged caution when it comes to Alcoa's performance.

Conclusion

The recent downgrade of Alcoa stock by JPMorgan ahead of its earnings report raises important considerations for new businesses in the aluminum industry. The concerns highlighted by analyst Bill Peterson regarding weaker near-term fundamentals in the aluminum market and anticipated capacity restarts in China may have broader implications for companies entering or operating in this sector. One major challenge for new businesses in the aluminum industry is the potential slump in global aluminum prices due to the planned smelting capacity restarts in China. This, combined with restricted capacity caused by low rainfall and hydro reserves, may result in increased supply-side pressures and significant discounts. Additionally, the increase in Russian aluminum supply, despite customer preferences for metal from other countries, adds to the competitive landscape. The concerns outlined for Alcoa's future, such as ramping up capacity amidst weak fundamentals and high energy and restart costs, should also be considered by new businesses. Furthermore, obtaining mining extensions and dealing with growing activism could pose additional hurdles. In light of these challenges, new businesses in the aluminum industry may need to carefully assess market conditions, competition, and potential operational obstacles. It is crucial to monitor global aluminum prices, supply-demand dynamics, and regulatory environments to navigate potential risks effectively. Despite the downgrade for Alcoa, Peterson's positive outlook on the aluminum industry as a whole suggests that long-term prospects remain promising. However, new businesses should exercise caution and consider alternative opportunities, such as Constellium, which warrants an overweight rating due to its discount compared to peers and potential capital returns. Overall, while the downgrade of Alcoa stock is specific to the company, it serves as a reminder of the challenges and complexities that new businesses in the aluminum industry may face. Diligence, adaptability, and a thorough understanding of market dynamics will be key to success in this ever-evolving sector. Article First Published at: https://www.cnbc.com/2023/07/14/jpmorgan-downgrades-this-aluminum-stock-ahead-of-earnings.html