On Nov 29, we issued an updated research report on Century Aluminum CENX.
Century Aluminum posted a bigger loss on a reported basis in the third quarter of 2016. Adjusted loss for the quarter was much wider than the Zacks Consensus Estimate. Revenues tumbled year over year on lower shipments, but beat expectations.
The company, in its third-quarter call, stated that while demand has been relatively good, supply (excluding China) remains constrained. However, the growing level of imports from China has been negatively affecting value-added product premiums. The company believes the market is still adversely affected by the large amount of overcapacity and overproduction in China.
Century Aluminum is still faced with a difficult pricing environment. Aluminum prices, which have recovered somewhat of late, still remain under pressure due to supply glut. For 2016, 2 million metric tons of new aluminum capacity is expected to come on stream in China. Startups and restarts in China led to a roughly 3% rise in global primary aluminum production in the third quarter. The company expects significant capacity additions from China in the fourth quarter which will outpace consumption and further increase the country’s already oversupplied position.
Moreover, higher prices of alumina (which the company purchases from third-party suppliers) due to increased demand from Chinese smelter production growth affected the company’s earnings in the third quarter and is expected to remain a headwind through the balance of 2016.
The company is also seeing high power costs at its Mt. Holly smelter. Century Aluminum, in July, reached a new agreement with a third-party supplier to purchase the majority of electric power required for Mt. Holly. However, the company continues to be required to purchase 25% of the plant's power consumption from the state-owned provider. The agreement has allowed the smelter to continue to operate at around 50% capacity while the company looks for a competitive long-term arrangement.
Nevertheless, Century Aluminum is implementing a number of actions to reduce costs and preserve cash amid a still challenging operating environment. The company anticipates achieving annualized savings of $40–$65 million through these measures that include operating expense reductions.
Century Aluminum should also benefit from acquisitions and value-added investment projects. The company also has low financial leverage.
Century Aluminum is a Zacks Rank #3 (Hold) stock.
Other Stocks to Consider
Better-ranked companies in the basic materials space include POSCO PKX, AK Steel Holding Corporation AKS and Ternium S.A. TX.
POSCO holds a Zacks Rank #1 (Strong Buy) and has an expected earnings growth of around 852.4% for the current year. You can see the complete list of today’s Zacks #1 Rank stocks here.
AK Steel, a Zacks Rank #2 (Buy) stock, has an expected earnings growth of 205.8% for the current year.
Ternium sports a Zacks Rank #2 and has an expected earnings growth of around 187% for the current year.
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