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Alcoa's US aluminum smelter restarts dependent on Trump's tax reform

Alcoa Corp. is waiting for a clearer picture on U.S. President Donald Trump's planned tax reforms before deciding whether or not a restart of its idled aluminum smelters is possible.

The company shuttered its 191,000-tonne-per-annum Rockdale smelter in Texas in 2008 and its 269,000-tonne-per-annum Warrick smelter in Evansville, Ind. — the largest operating aluminum smelter in the U.S. — in early 2016.

In Washington, Alcoa has curtailed 49,000 tonnes per annum of capacity at its Intalco smelter and 41,000 tonnes of capacity at its Wenatchee smelter.

Executive Vice President and CFO William Oplinger said during a Jan. 24 conference call that it was too early to determine what impact Trump's tax reforms would have on Alcoa's bottom line.

"We think it's way too early to speculate what type of implications changed tax policy would have on us," he said. "We've got earnings that are generated overseas, we've got losses largely in the U.S. due to some of the overhead costs and things like that which we don't get a tax advantage on."

However, Oplinger added that Alcoa retains optionality with respect to restarting any of its idled capacity.

"We don't know which way the government regulations will go or the view of which way the government will go," he said.

"We have the optionality in the U.S. We've got some facilities that could be restarted in the case of higher metal prices, but clearly we've got to see what comes out."

On the upside, the U.S. Midwest premium has witnessed some positive movement recently, which bodes well for bringing idled capacity back online. Since the start of October, the price has risen 42% to 9.25 U.S. cents per pound, according to S&P Global Platts.

"When you think about the moves in the Midwest premium, they seem to be pretty closely tied with what's happening on the physical side," CEO Roy Harvey said during the conference call.

"So we've seen that premium start to come up a little bit."

This upward trend could continue with expectations of increasing Chinese demand, limited supply and rising input costs in 2017.

In China, both the alumina and aluminum markets have limited curtailed capacity that can be brought back online quickly to address increased demand.

"In alumina, only about 1 million tonnes of the 14 million tonnes curtailed in the last cycle remain offline," Harvey said. "In metal, about 2 million tonnes of 4 million tonnes remain curtailed."

Chinese alumina and aluminum producers are also facing significant cost pressures.

"As we enter a period of relative quiet demand for the Chinese New Year, these cost pressures have driven more than 38% of Chinese smelters to a position of negative cash generation," Harvey noted.

"Furthermore, if you consider market alumina prices for integrated operators, 65% of Chinese smelters would be underwater."

Alcoa sees the alumina market being in relative balance and the aluminum market having a slight surplus in 2017, with expectations of strong demand for both commodities.

Chinese demand growth of 6% for the aluminum market is forecast for 2017, driven by end-use market growth in the packaging, electrical and transportation sectors.

Harvey said ex-China growth of 2% will be led by the North American market, where 3% demand growth is expected this year.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.