Credit Suisse analyst Curt Woodworth downgraded Alcoa (NYSE:AA) to Neutral from Outperform with a price target of $82.00 per share, up from $67.00.
Woodworth sees LME aluminum prices near peak with the geopolitical tensions starting to moderate and have a lower degree of impact on markets.
While we see current geopolitical events as driving lasting structural support for aluminum prices relative to the 2018 Rusal sanctions, we do believe supply/demand balances will start to normalize in 2H-22 as trade flows are gradually realigned, off-warrant material is monetized, and smelter operating rates sharply recover in China, Woodworth said in a client note.
On the other hand, Alcoa continues to experience inflationary pressures.
Accelerated cost pressures for caustic soda, pitch & coke, as well as energy/power remain headwinds. Higher caustic/carbon costs flow into COGS on lag with more impact to be felt in 2Q with prices up ~$250-350/mt y/y. AA buys ~1mt caustic annually. AA is likely to accelerate capex ahead as new low carbon technologies inch closer to commercialization. Given the current valuation, we argue the impacts from cost inflation and potentially higher capex matter to FCF yield value, the analyst added.
When it comes to Western sanctions on Russia, the analyst notes there have been limited direct sanctions on Rusal's aluminum exports.
Alcoa share price is down 1.2% in pre-open today.
By Senad Karaahmetovic