S&P Global Ratings boosted its rating outlook on Alcoa Corp to positive from stable on Tuesday, and affirmed its 'BB-' corporate credit rating.
S&P attributed the stronger outlook to cost reductions, improved profitability, growing cash balances amid stronger alumina and aluminum prices in 2017.
Although the actual price of alumina fell steeply for a large part of the first five months of the year, according to S&P Global Platts assessments, the alumina price as a percentage of London Metal Exchange aluminum values was significantly higher compared with the same period a year ago.
S&P said its rating on Alcoa reflected its view of the company's average cost profile in primary aluminum production, long-lived bauxite reserves and low-cost alumina production, good geographic breadth, and unstable credit measures owing to its exposure to volatile aluminum and alumina prices.
S&P noted that Alcoa had a moderate debt load, large unfunded post-retirement benefit obligation and high capital intensity.
The ratings firm said Alcoa's credit ratios were improving sharply, supported by higher aluminum prices, cost reductions and some net debt reduction since the company's de-merger from downstream operations last November.
S&P said the cost position of Alcoa's primary aluminum assets has improved in recent years, a key rating factor.
Combined with attractive, low-cost bauxite mining and alumina refining output, S&P said it expects Alcoa's upstream margins to improve toward the industry average over the next few years, and become more resilient to aluminum prices, which can swing 20% in a year.
The ratings firm noted that Alcoa is moving its average primary aluminum production costs down the industry's cost curve by closing less efficient capacity, such that its portfolio of smelters benefit from a relatively high proportion of competitively priced or internally generated electricity, a critical cost driver.
As a result, Alcoa's share of global aluminum output is small, having dropped to about 7% in 2016, as the industry's competitive balance shifted to China and jurisdictions with excess power, such as Russia and the Middle East, S&P said.
Additionally, S&P noted that Alcoa operates in an industry that is characterized by high barriers to entry and a moderate degree of concentration among leading producers, but with latent capacity around the world that can contribute to periods of oversupply and price weakness.
That said, power constraints in China in 2017 have compelled policy-driven reductions in output and the shelving of new aluminum smelters, supporting higher prices, S&P also said.
Further supporting Alcoa's business profile is its broad revenue diversity, which includes margin-stabilizing downstream cast and rolled products, S&P said.
S&P Global Ratings and S&P Global Platts are part of the S&P Global group of companies.
