Alcoa's Upgrade Amid Rising Aluminum Prices#

Alcoa has received an upgrade from JPMorgan, moving from an Underweight to a Neutral rating. This change comes as aluminum prices are rising due to supply disruptions in the Middle East, improving Alcoa’s short-term earnings outlook. However, challenges such as higher energy costs and demand uncertainties still loom.

Impact of Middle East Conflicts on Aluminum Prices#

Since the onset of the conflict in Iran last month, aluminum prices have surged by about 12%. In contrast, the Bloomberg Commodity Index has only seen a 2% increase. This price rise is significant because the Middle East accounts for nearly 20% of global aluminum demand outside of China through net exports.

JPMorgan warns that if the conflict continues, it could lead to more force majeure declarations—legal terms that allow companies to avoid fulfilling contracts due to extraordinary circumstances—and smelter production cuts in the region. Once production halts, restarting operations can take months, which would further tighten supply and keep prices high.

Future Price Projections and Earnings Impact#

JPMorgan's commodities team suggests that aluminum prices could reach $4,000 per metric ton if supply issues persist. This outlook has prompted the bank to set a price target of $68 for Alcoa by December 2026, based on revised commodity price forecasts. Currently, many smelters in the region have reduced production or declared force majeure, with estimates indicating they hold about 20 days of alumina inventory. Once this inventory runs out, further production cuts may occur.

Challenges Ahead for Alcoa#

Even if the conflict resolves soon, supply disruptions may continue as smelters can take months to restart. For instance, Qatar’s Qatalum has indicated that it may take six to twelve months to return to full production after a shutdown.

Higher aluminum prices would significantly boost Alcoa’s earnings, with JPMorgan estimating that every $100 increase in aluminum prices could add approximately $237 million to the company’s annual earnings before interest, taxes, depreciation, and amortization (EBITDA). However, rising energy costs and lower alumina prices could limit these gains. Natural gas, which constitutes about 18% of alumina refining costs, has increased over 50% since the conflict began.

JPMorgan now anticipates aluminum prices to average $3,385 per ton in 2026 and $3,240 in 2027, while predicting lower alumina prices of around $300 and $315 per ton for the same years.