Earnings Call
Alcoa Corp (AA)
Earnings Call Transcript - AA Q3 2021
Operator, Operator
Good afternoon and welcome to the Alcoa Corporation, Third Quarter 2021 Earnings presentation, and conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to James Dwyer, Vice President of Investor Relations. Please go ahead.
James Dwyer, Vice President of Investor Relations
Thank you, and good day, everyone. I'm joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer, and William Oplinger, Executive Vice President, and Chief Financial Officer. We will take your questions after the comments by Roy and Bill. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the Company's actual results to differ materially from these statements are included in today's presentation and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings release and slide presentation are available on our website. With that, here's Roy.
Roy Harvey, CEO
Thank you, Jim. And thanks to those who are joining our call today. We had another strong quarter bolstered by aluminum prices that are higher than we've seen in more than a decade. As in every quarter, Will and I will discuss these results and take your questions. Before we get underway, however, and particularly at a time where we are experiencing rapidly changing market dynamics, I would like to reinforce once again that our values, which we established when we launched as an independent company in 2016, continue to guide us. It's not just about the results, but also how we achieve them. Our values continue to be foundational for our Company and are embedded in all of our decisions. Now, as Alcoa Corporation approaches its five-year anniversary, we've been reflecting on the achievements Alcoans across the globe have helped us to accomplish. It is clear that our strategic priorities are creating value. Today, Alcoa is much stronger than when we launched. We have significantly improved our processes, we've strengthened our balance sheet, we've reshaped our portfolio. We've responded to society's need for responsible production, launching the industry's most comprehensive portfolio of low-carbon products. And we've also certified many of our assets to the stringent standards of the Aluminum Stewardship Initiative. In addition, our strategic priorities have helped us to do exactly what we said we wanted to do, strengthen our company to prepare for an even brighter future. And today, we've reached an important milestone. As you saw from the press release that we just issued, Alcoa has decided to initiate a quarterly dividend. Additionally, we've authorized a new share repurchase program that will complement our existing program that was authorized in 2018. These decisions concerning capital returns align with our existing capital allocation framework and reflect two important points. First, we have confidence in the strength of our company and our ability to generate cash to sustain these programs through the commodity cycle. Today, both our balance sheet and operating portfolio are in a much stronger position with no substantial debt maturities until 2027. Second, we believe the markets we participate in will be stronger, that this cycle will last longer, and that Alcoa is well-positioned to deliver in a low-carbon, ESG-focused world. But our work is never complete. These achievements simply serve as a strong foundation. Despite the positive financial news, I am disappointed that we had a serious injury in the quarter. An electrical contractor in Brazil sustained a life-threatening electrical shock. Thankfully, he recovered and has now returned to work, and we've implemented corrective actions. Our focus must always be on the safety of everyone who visits or works at our facilities. As our comments progress today, I'd like to highlight some recent initiatives that align with our strategic priorities and that used this strong foundation as a starting point. The Alumar restart that will be powered by renewable energy, the joint development project for high-purity aluminum, and our net-zero ambition. The green evolution is happening fast. And as evidenced by these projects, we are positioning ourselves for the future. Also, we'll talk more today about the strength in aluminum pricing and an improved pricing trend in alumina. But first, let's review the financials with our CFO, Bill Oplinger. Bill, please go ahead.
William Oplinger, CFO
Thanks, Roy. This quarter was even better than the previous one. Revenues at $3.1 billion were up $276 million or 10% sequentially. Revenues were up $744 million or 31% from the same period last year on higher aluminum and alumina prices. Realized aluminum prices were up 13% sequentially and 64% year-over-year. Third-quarter earnings per share was $1.76 per share, $0.13 per share higher than the prior quarter, and $2.02 per share higher than the year-ago quarter. Adjusted earnings per share for the third quarter increased 38% sequentially to a record $2.05 per share. Adjusted EBITDA, excluding special items, also increased up 18% sequentially to $728 million, much higher than last year's $284 million. These charts, which debuted last quarter, showed that the Aluminum segment with modest income taxes and virtually no minority interest continues to outperform and drive record net income. In the first nine months of 2021, the aluminum segment has had its best year so far with nearly $1.4 billion or 73% of Alcoa's total adjusted EBITDA, excluding special items of $1.9 billion. That segment EBITDA generated record-adjusted net income. Before this year, our best full-year adjusted net income was in 2018 at $698 million. In 2021, our adjusted net income for the first nine months is already $822 million or $124 million higher. Now with aluminum prices remaining at post-global financial crisis highs and alumina prices recovering nicely, earnings should be even better in the fourth quarter. Now let's review adjusted EBITDA in more detail. The $110 million increase in adjusted EBITDA, excluding special items was driven by higher metal prices, as well as favorable currencies, slightly higher alumina prices, and better product pricing in alumina and aluminum. However, as you know, a bauxite unloader at Alumar sustained structural damage in mid-July and we ramped down refinery production by roughly one-third, with corresponding impacts to bauxite production at Juruti. This outage had a $27 million impact in the quarter, mostly affecting shipment volume and production costs. In addition, we experienced a few other impacts from the quarter. Higher raw material costs, mostly caustic in the alumina segment and carbon product in smelting. Higher energy costs in Europe and to a lesser extent in Brazil were unfavorable by $71 million. Spain costs increased by $53 million while we also experienced higher costs in Norway and Brazil. These increases were favorably offset by strong earnings in the Brazil hydros, the highest earnings in a decade for a net unfavorable energy impact of $17 million. Lastly, in the aluminum segment, rail car delays in Canada and seasonal shipping patterns in Europe negatively impacted the results in the quarter. The other column primarily reflects the non-recurrence of the Portland Smelter government support, which ended in the second quarter after we re-powered the facility through July 2026 and increased accruals for residue storage area improvements in Brazil. Now, let's look at impacts on our cash flows. The cash flows continue to highlight major corporate actions as well as the benefits from very strong adjusted EBITDA. To illustrate the strong cash generation of the last quarter, we've bridged from the second quarter ending cash balance to the third quarter cash balance. Cash declined $200 million to $1.45 billion. Our largest single outlay was $518 million in September when we redeemed the 2026 bonds, followed by working capital use of $206 million, $83 million of capital expenditures, and a modest $19 million of pension and OPEB funding, which is mostly OPEB. EBITDA and other factors provided net inflows of $626 million. On a year-to-date basis, you can see the benefit of the strong nine months of EBITDA and the additional major sources of cash inflows, including non-core asset sales and the $500 million bond issue. Those cash flows and earnings before interest taxes, depreciation, and amortization also impact key financial metrics. Return on equity increased to 30.2% for the first nine months of 2021. Nine months of 2021 free cash flow less non-controlling interest distributions was negative $51 million due to the second quarter's $500 million pension funding, but was positive $320 million in the third quarter due to the strong EBITDA partially offset by a three-day increase in days working capital. Most importantly, our key leverage metric, proportional adjusted net debt, is now below our $2 billion to $2.5 billion target range at $1.7 billion. Working capital has increased in line with expectations as metal prices continue to rise and now are being joined by alumina price increases. Moving to our outlook for the remainder of the year. The full-year 2021 outlook is expected to see modest changes. For Bauxite shipments, the expected ranges are decreasing by 1 million tons to 49 to 50 million tons due to the Alumar unloader outage in the third quarter. We're expecting improvements on the income statement below the EBITDA line. Depreciation, depletion, and amortization is expected to improve $10 million to $665 million, while interest expense is also expected to improve $10 million due to our redemption of the 2026 notes. In the cash flow section, there are three expected changes. Return-seeking capital expenditures are expected to be $10 million lower, payment of prior year taxes has been adjusted down $5 million to $30 million, and environmental and asset retirement obligation spending is expected to be $20 million better down to $120 million for the year. For the fourth quarter, overall, with Alumar refinery production returning close to normal operating levels, and if current aluminum and alumina index pricing levels persist, we expect another record-setting quarter. However, at the San Ciprian Refinery and Smelter, the current high energy cost in the country and the strike, if both persist through the quarter-end, are expected to be primary factors decreasing adjusted EBITDA by approximately $100 million sequentially, and increasing working capital sequentially, by $120 million. Included in the San Ciprian impacts are in refining, we expect sequentially lower shipments of 86,000 metric tons and an unfavorable EBITDA impact of approximately $15 million. In smelting, we expect sequentially lower shipments of 52,000 metric tons and an unfavorable EBITDA impact of approximately $85 million. For the rest of the portfolio, adjusted EBITDA in the Bauxite segment is expected to improve by $10 million sequentially, primarily due to recovery from the Alumar unloader outage in Q3 2021. Aside from index pricing, currency, and the San Ciprian impacts that I mentioned, the alumina segment adjusted EBITDA is expected to be flat sequentially. Higher shipments, cost improvements, and the partial recovery from the Alumar unloader outage are expected to offset higher raw materials and energy costs. In the aluminum segment, again, excluding the San Ciprian impact, index pricing, and currency impacts, and assuming today's spot alumina prices persist, while we expect a substantial benefit in the alumina segment. Alumina costs in the aluminum segment are estimated to increase by $100 million. Higher shipments are expected to offset increased raw materials and production costs. Energy-related impacts are expected to be comprised of two factors: $30 million as Brazil hydro sales seasonally decline and higher smelter energy costs of $20 million, primarily in Norway. Now, let me turn it back to Roy.
Roy Harvey, CEO
As Will noted, the aluminum segment has a significant role in our profitability. The LME aluminum price is the highest it has been in 13 years and has doubled relative to the low point in the second quarter of 2020. In addition, regional premiums are being influenced by higher transportation costs into deficit markets, such as North America and Europe. The continued economic recovery in the tightness of supply has continued to support this LME rally and high regional premiums. We continue to see positive GDP and industrial production across the world's leading economies, which supports aluminum demand across all major end-use sectors. This year, we expect the annual global demand for primary aluminum to increase approximately 10% relative to 2020 and to surpass the pre-pandemic levels of 2019. Strong demand is also being supported by China's continued status as a net importer of primary aluminum. In 2021, China has curtailed more than 2 million tons of annualized capacity due to power shortages and its enforcement of policies related to energy and the environment. These curtailments represent one of the largest supply cuts the aluminum industry has ever experienced, particularly given that they are occurring during a year in which we have seen strong demand growth. These supply dynamics are not only occurring in China; there have been recent reports in Europe regarding energy shortages and high power costs that may lead to smelting cuts there as well. For Alcoa's commercial impacts, we are also seeing significant year-over-year growth for our value-add aluminum products. In the third quarter, the premiums we earn for value-add products were up relative to the second quarter. Strong demand supported high spot premiums for open volumes. Much of our volume for value-add products are sold in annual contracts, so only a portion benefits from high spot pricing. However, current market dynamics provide a positive environment for 2022 contract negotiations. Next, I'd like to comment on what we're seeing in the aluminum market, which is also on the rise. As we've noted previously, we are the world's largest third-party producer of alumina, and market fundamentals there have also become more favorable over this last month. In the first two months of the quarter, ex-China, alumina prices remained more muted than in aluminum. High freight costs made shipments to China unattractive, and the market outside China had sufficient supply. However, in the last month or so, we have seen a substantial rally in ex-China alumina pricing. Some unplanned production disruptions outside of China reduced the amount of alumina available for spot purchases. At the same time, some refineries in China have restricted production due to the same dynamics I discussed earlier in regards to the smelting costs, power shortages, and policies related to the environment and energy. These dynamics have driven current global supply tightness in alumina. While China remains short on alumina as a net importer, it is now competing with smelters outside of China for available alumina. As a result, prices for alumina outside of China are at the highest levels they've been since 2018. Now, let's move to a slide that recaps some of the items that Alcoa has been doing to support our business for the future. Our strategic actions over the past two years and our ongoing activities are positioning Alcoa for the future. Two years ago, we announced three key strategic programs: the new operating model, non-core asset sales, and the portfolio review. We've already met the goals on two of these. First, we fully implemented the new operating model and captured the annual savings. Second, we also met the top end of our target for non-core asset sales. The portfolio review meanwhile has three years remaining and was designed to improve both the cost structure and sustainability position of our global production assets, focusing primarily on smelting and refining. It considers options for significant improvement, curtailment, closure, or divestiture. At this two-year mark, we've already addressed nearly half of the 1.5 million tons of smelting capacity with a re-powering at Portland, the curtailment of Intalco, and restarting Alumar. The announced restart of 268,000 metric tons of smelting capacity in Brazil equates to our share of Alumar's nameplate capacity. It will supply the short Brazilian market, and the smelter will be fully powered with renewable energy by 2024. We've earlier reported that 78% of our global smelters are powered by renewables, and we expect that percentage to reach 85% by the conclusion of the portfolio review in 2024. In refining, we've also addressed half of our global goal of 4 million tons of refining capacity with the 2019 closure of the Point Comfort Refinery in Texas. Now, let's move to the right-hand side of this slide. In September, we took another step to strengthen our balance sheet and redeemed in full $500 million in senior notes issued at a 7% interest rate that was due in 2026. We used cash on hand to repurchase this debt. A stronger financial position is an outcome of our focus on aligning decisions with our strategic priorities, including our imperative to advance sustainably. Last month, we added even more production facilities to our list of locations certified to the Aluminum Stewardship Initiative, the industry's most comprehensive third-party system to verify responsible production. Today, we have 15 global sites certified to ASI's performance standards. The latest was two Canadian smelters, ABI and DeChambeau. Congratulations to those teams in Quebec for earning these certifications. Importantly, we also have ASI's chain of custody certification, which allows us to sell ASI-certified bauxite, alumina, and aluminum. And we've earned a premium on ASI-certified products, which we can sell globally. Earlier this month, we also announced the beginning of a joint development project related to the market for high-purity alumina or HPA. Industry analysis shows that demand for HPA will be strong with increasing year-over-year demand due to the need for low-carbon solutions in transportation and other sectors. HPA is used to create a variety of products for a sustainable economy. This includes lithium-ion batteries that are the backbone of clean, emissions-free electric vehicles, and energy-efficient LED lighting applications. While we are still at an early stage of development, we believe our process knowledge of alumina refining can help ensure the operational and financial success of this joint development project. And more generally, across our alumina refineries, it is important to note that Alcoa has the world's lowest carbon intensity in its global refining system. This too, with an advantage now, and in the future for our smelter grade and non-metallurgical businesses, both of which are the largest outside of China. Finally, I am proud of our ambition to reach net-zero by 2050 for scope 1 and scope 2 greenhouse gas emissions across our global operations. Announced earlier this month, this ambition complements our climate change policy and existing greenhouse gas targets, which we discussed more fully in our annual sustainability report. To work toward this ambition, we are focused on increasing the share of our operations powered by renewable energy and commercializing some of the breakthrough innovations we've discussed previously, such as the ELYSIS Technology, which eliminates all direct greenhouse gases from the traditional aluminum smelting process, and adapting mechanical vapor recompression to alumina refining to further reduce our already low carbon intensity. Next, I wanted to quickly highlight the news we announced earlier today. We are proud to initiate this quarterly dividend and authorize a new buyback program. Since our core corporation launched nearly five years ago, we've talked about strengthening our company. This announcement is clear evidence of the work that Alcoans across the globe have completed to position the company to succeed, not only in the favorable market environment we're seeing now but through the commodity cycle. Today, Alcoa is stronger than it has been since our inception. And with our current view of the market and expected cash flows, we believe these programs can be sustained. The decision regarding capital returns aligns with our current capital allocation framework. To review, the framework prioritizes maintaining liquidity and investing capital to sustain and improve our operations. Next, we aim to maximize value-creation opportunities across four categories listed in no specific order. One of those, of course, is returning cash to stockholders, which we've demonstrated today. Now, let me briefly highlight the other three value creation opportunities. First, we've made great progress in reducing our debt. As mentioned, our adjusted proportional net debt is now below our target range of $2 billion to $2.5 billion. Today, our Company has no substantial debt maturities until 2027 and our expected cash pension funding requirements are at their lowest levels. As we've said previously, our net debt may fluctuate, but we intend to maintain a strong balance sheet through the cycle. Second, another focus is the transformation of our portfolio, building on the progress we have already made in this five-year program. Finally, we continue to evaluate value-creating growth projects and pursue opportunities that will generate an adequate rate of return. Now, as we prepare for your questions, I want to summarize a few important items. First, it's a very good time to be in the upstream aluminum business. We have a long position in all three of our segments, and the work that we've accomplished while continuing has made us more competitive, enabling us to succeed through the commodity cycle. Because of this work, we're well-positioned to capture benefits from improved markets, including the very healthy aluminum prices that we're currently seeing. Next, I'm proud to say that our core corporation is stronger today than at any other time. Our strategies are working and our balance sheet is in the best shape ever. This improved financial strength has allowed more flexibility to execute on our capital allocation framework, including the authorization of further returns to our investors. Thank you for your support and trust in Alcoa. Finally, we're ready for a sustainable future. As we approach our five-year anniversary next month, I'm excited about what's ahead as we move forward as a stronger company that can deliver value to our people, our processes, and our products. Will and I are now ready to answer your questions.
Operator, Operator
We will now begin the question-and-answer session. When called upon, please limit yourself to two questions. At this time, we will pause momentarily to assemble the roster. And our first question comes from Carlos De Alba of Morgan Stanley. Please go ahead.
Carlos De Alba, Analyst
Hello. Good afternoon, everyone. Congratulations on the quarter. I have a couple of questions regarding the smelters. Can you provide more details on whether you are considering potential restarts of the curtailed capacity? Some of these actions were taken only a few quarters ago, but the market has shifted, so I’m curious if there are any plans for restarts beyond Alumar. Speaking of Alumar, could you share information about the type of power agreement you've secured? Is it a renewable mini-hydro power source, and why will it only be fully sourced by 2024? Additionally, I would like to ask about the recently announced HPA project. Can you elaborate on the economics compared to the previous year, particularly the expected price spread for these types of alumina relative to the smelter grade alumina that you mainly produce? Thank you very much.
Roy Harvey, CEO
Thank you for the question, Carlos. To begin, I'll address your inquiry about smelters, and Bill can add to this as we proceed. The restart of Alumar is a good illustration of the effort needed for any restart. We decided to restart Alumar because we can access very competitive and renewable energy starting in 2024. This plant is competitive and meets our criteria, especially considering the domestic market in Brazil is currently short, which enhances the financial advantages of this decision. The other smelters we have curtailed were closed for specific reasons as well. In our evaluations, we consider current pricing and future trends, aligning that with where we believe these smelters will stand in terms of cost competitiveness. The Alumar decision reflects our commitment not only to succeed in the current market but to ensure our smelters remain competitive across various commodity markets in the future. We will keep assessing our options, but we are not announcing anything new at this moment. We have curtailed additional capacity but need to secure long-term power that meets our cost criteria. Regarding Alumar Power, it takes time to ramp up, and we aimed to power it with renewable energy, typically hydro in that region of Brazil, aligning with our timeline for full capacity. The specific details of the contract ensure a competitive rate to help us succeed through the commodity cycle. On your third question about HPA, I’ll let Bill add any insights, but the short answer is that we are in the early stages of this project. We understand the market and the technology our partners are offering, but we need to validate that technology and be more confident in the outcomes before proceeding. Thus, we have structured this with a series of options as we progress, and while we’ll have more insights on the economics later, there’s not much to share at this moment.
William Oplinger, CFO
Nothing further to add. I think you covered it well, Roy.
Roy Harvey, CEO
Thanks, Carlos.
Carlos De Alba, Analyst
Thank you very much. Roy. Just one clarification. Is it fair to say that going forward, if you were to restart any remaining curtailed aluminum production, that the type of power, meaning it has to be renewable power or not necessarily?
Roy Harvey, CEO
We consider the type of energy and how that fits with our short-term, medium-term, and long-term environmental criteria as part of any of those decisions. The fact is that we've just re-powered the Portland facility, which has a goal to move towards more renewable energy. But because it has a relatively short timeline, we were comfortable stepping into that power contract at that time. When you look at Alumar, of course, this is a longer power contract, and not the fact that it was renewable becomes more and more important. So, I know that doesn't specifically answer your question but it gives you a feel for how we look at ESG criteria and specifically the percentage of renewable power that goes into those contracts as we make those decisions.
Carlos De Alba, Analyst
Thank you, Roy and Bill. Congratulations on the results again.
Roy Harvey, CEO
Thanks, Carlos. See you.
Operator, Operator
The next question comes from Emily Chieng, of Goldman Sachs. Please go ahead.
Emily Chieng, Analyst
Hi, Roy and Bill. Congratulations on the quarter. I have a quick question about the capital allocation strategy. The leverage is looking good, you've implemented the capital returns, and you've addressed about half of your smelting capacity portfolio review. How do you plan to execute the buyback? Will it be more systematic or opportunistic? Also, what is the latest thinking regarding the pensions?
William Oplinger, CFO
Thank you, Emily. I’ll address your second question first regarding pensions. They are in much better condition than they have been in the past, with global pensions over 90% funded and U.S. pensions nearing 100% funding. As a result, the net liability has been significantly reduced. However, we still have a fairly large gross liability and will explore opportunities to annuitize more of that. In the U.S., we have shifted the asset portfolio to a more defensive strategy to protect against significant interest rate fluctuations, and we will continue to seek annuitization opportunities. Regarding capital allocation and the timing of buybacks, we will base our decisions on ongoing market analysis, financial conditions, and other considerations, and this will be a gradual process. If you look at our capital allocation program, as Roy mentioned, we’ve announced a return to shareholders and have executed well on that program.
Emily Chieng, Analyst
Thanks. That's really helpful. And just 1 follow-up; when you think about the current state of the aluminum markets, what are Alcoa's views around potentially investing in either Greenfield capacity or Brownfield opportunities in cleaning some production creep at your lower-cost assets. I'll leave it at that. Thank you.
Roy Harvey, CEO
Sure, I can address that question, Emily. We are gradually enhancing some of our low-cost facilities that have long-term energy solutions, especially in Canada, where we can incrementally improve our technology. This requires careful planning from our engineers and operators. We are aligned with this strategy. Regarding Greenfield or Brownfield investments, we need to consider a longer timeline for aluminum pricing and evaluate supply and demand dynamics. We are noticing significant structural changes in the aluminum market, which reinforces our position. This is closely tied to the energy market, and as we discussed with Carlos, the focus is on renewable energy. For any smelting decision, it is crucial to find low-carbon and renewable options. Another critical factor is capital costs; we need to navigate the balance between investment and achieving solid financial returns. China's ability to build plants at low costs, along with the past decade of overproduction, has made it challenging for every Brownfield or Greenfield project developed during that time to meet expected shareholder returns, and we take that seriously. It will take time to observe the outcomes of these structural shifts. Additionally, we are actively working on developing ELYSIS Technology, which presents a critical choice between investing in conventional methods and pursuing what we believe will be the future standard for zero-carbon smelting. This consideration is significant for us and weighs heavily on our decision-making.
Emily Chieng, Analyst
Thanks for the color, Roy.
Roy Harvey, CEO
Thanks, Emily.
Operator, Operator
The next question comes from Alex Hacking of Citi. Please go ahead.
Alex Hacking, Analyst
Thanks, Roy and Bill. First question about San Ciprian. I know it's a sensitive situation, but are there any deadlines or dates for reaching a resolution? Secondly, a somewhat unrelated question, but do the shortages of alloying agents like magnesium impact Alcoa? Any insights on that would be appreciated. Thanks.
Roy Harvey, CEO
So, Alex, let me quickly discuss San Ciprian, and then I'll hand over the alloying question to Bill. There are currently no specific dates in mind. Alcoa is still looking for a solution for San Ciprian. The main issue is the price of power in Spain, which has worsened recently due to the fluctuations in energy markets in Europe. The cost of power in Spain has significantly outpaced that of other global smelters even before this crisis. We have been trying to negotiate with the government to address the competitiveness issues at San Ciprian. We have also denounced the collective dismissal, and since then, the strike has resumed, which is impacting us financially. We are currently appealing the decision made by the Galician courts. There is still little clarity on when this situation will be resolved, but it is a top priority for us and has a significant financial impact. We will keep you updated as we learn more.
William Oplinger, CFO
Hi, Alex. Let me address the alloying agent's question. To provide some context, silicon and magnesium are currently significant concerns for many. We purchase approximately 20,000 metric tons of each metal. As you're aware, China is responsible for about 80% of the magnesium production and 70% of the global silicon supply. The trends we're observing in the aluminum sector are also impacting the magnesium and silicon markets due to production cuts in China. However, the positive aspect is that we are able to pass most of these impacts on to our customers. We anticipate that through strategic purchasing or customer contracts, we will be able to transfer about 95% of the increased costs of magnesium and silicon to them.
Alex Hacking, Analyst
Thanks, Bill. If I could just follow up. Are shortages a concern, more so than the ability to patch the price through?
William Oplinger, CFO
Shortages are a concern and our procurement team is actively working on trying to make sure that we have enough material to be able to supply our customers. But shortages are our concern.
Alex Hacking, Analyst
Okay, thanks so much. Appreciate the time.
William Oplinger, CFO
Thanks, Alex.
Operator, Operator
The next question comes from Lucas Pipes of B. Riley Securities. Please go ahead.
Lucas Pipes, Analyst
Hey, good afternoon. And I would like to add my congratulations on a good quarter. My first question is in a similar vein, but maybe a bit higher level, just in terms of aluminum prices today, obviously, incredibly strong. Have you tried to kind of tease out what is demand-pull here? What is cost-push? And where some of these bottlenecks could lead us? I would very much appreciate your perspective.
Roy Harvey, CEO
Sure, Lucas. I think it's challenging to clearly separate what's driven by demand, which remains very strong, from the supply chain issues that are causing some pullback. We're observing significant changes on the supply side. Looking beyond China, which has less influence on supply, European smelters linked to market prices are struggling to operate effectively in the current economic climate. We've already witnessed some initial reactions, and while this situation will evolve, it's unclear how it will develop. Even amidst current pricing, maintaining supply is difficult given the rising gas prices in the European Union. In China, they've been faced with a series of challenges, including flooding and stringent environmental policies. These factors are interconnected with their dual control system. In the short term, we've seen around 23 million tons of production cuts due to these issues. Looking ahead, it's clear that China's policies are fundamentally changing the aluminum landscape, affecting both current and future supply. While demand stays strong, the real shift is concerning the supply side. Presently, there's a physical shortage, with inventory levels decreasing and regional premiums reflecting this trend. There's also a growing concern about insufficient new capacity coming online, particularly renewable energy-driven capacity, to meet future demand. Overall, this outlook is positive for current pricing, which is favorable, and for the long-term structural changes in the pricing environment.
Lucas Pipes, Analyst
Thank you very much for your perspective. You touched on my follow-up question at the end. You've mentioned that access to renewable power is key for increasing capacity. What role can you play in addressing that? You currently own renewable energy assets. Would you consider expanding those? Are you looking more towards developers for that power? How do you see that bottleneck?
Roy Harvey, CEO
I believe the answer encompasses all options. We can explore various methods to alleviate bottlenecks in the process and secure renewable energy. However, I want to emphasize that we are cautious about not subsidizing our aluminum business by developing our own renewable energy. You may have noticed this in Brazil. If we decide to establish a renewable energy position, we will need to determine whether it's more beneficial to utilize it for our smelters or to sell it in the market. We are careful not to mix decisions between these two types of businesses. Looking at our repowering efforts, for example in Portland, we've collaborated with power suppliers. Similarly, in Norway, we've partnered with new wind power facilities for our repowering initiatives. The reality is that there won't be enough renewable power available to meet the growing demand, and while there are numerous announcements about new facilities, the complexity involved in developing this renewable power is significant. Identifying opportunities to smelt aluminum efficiently while securing renewable energy contracts will present challenges. This is what creates structural change and will determine who can build for the future. Additionally, connecting renewable energy to a zero-carbon process like ELYSIS is crucial as we strive for a net zero world by 2050; such solutions are essential for achieving that goal.
Lucas Pipes, Analyst
Really, really exciting developments in the industry. I really appreciate your perspective. Thank you.
Roy Harvey, CEO
Thanks, Lucas.
Operator, Operator
Our next question comes from Curt Woodworth of Credit Suisse. Please go ahead.
Curt Woodworth, Analyst
Thanks. Good afternoon, Roy and Bill.
Roy Harvey, CEO
Hi Curt.
Curt Woodworth, Analyst
I have a follow-up question for Alex regarding magnesium and silicon. It seems there is a potential for shortages, and we've already observed significant increases in billet or foundry alloy premiums, which have risen dramatically by 500 to over a thousand per ton. This is quite significant, and while I understand you typically set contracts on an annual basis, do you feel confident in your current position? Are you planning to build safety stocks for those alloys? How do you anticipate that the shortage will influence your negotiations for value-add premiums next year? Additionally, can you provide any insight into how those premiums might compare next year to what you expected this year?
William Oplinger, CFO
Yes. So Curt, globally, value-add products demand is very strong. We are focused on Europe and North America. And if you go around the globe on the various value-add products, we're seeing strength in flat demand in just about every major area, both in Europe and in North America. The premiums, as you said, are extremely strong. And with some of the curtailments that we've seen in Europe due to the energy situation, it's taking supply of value-add products out of the market at a time when demand is very strong. And then foundry largely is an automotive market. And with the automotive chip shortage, we have seen the foundry market fall off a little bit, but we've been able to re-purpose a lot of that metal into different markets. And so, you don't really see it hitting our results. As we go into 2022, we use some of that market situation, and we will be looking to do as well as we can with value-add premiums in 2022. And we'll be making sure that we try to pass through all the mag and silicon price increases. As far as building stocks of mag and silicon, we clearly are out there making sure that we want to be able to fulfill our customers' needs. We will do the best that we possibly can. But upstream of us, we are starting to see some forced resource declared by suppliers. So, we are actively trying to make sure that we can meet our customer's and the customer's needs going into 2022.
Roy Harvey, CEO
And Curt, I'll just tease out one more point. And I mentioned it during my presentation, but I think it's worthwhile reiterating it. At a time like this with increasing premiums, we don't realize all those in the current year because we only sell a portion of our sales on spot. However, this is a great time to see strong premiums because we're in the midst of our discussions with all of our customers to set what those prices and premiums will be going into 2022. So, I think that's very good news for our value-added business, not just from the really strong demand and therefore, we can choose those products that make the most sense for us. But also, it's a good time to be setting premiums, looking now particularly in North America and Europe.
Curt Woodworth, Analyst
Okay. That's helpful. And then just a follow-up on power. I think roughly 55% of your power is LME indexed. I know you highlighted the same separate issue, but can you talk more broadly about power cost inflation through the portfolio over the next couple of quarters in the event we continue to see this energy shortage persist. Should we continue to expect those levels to have headwinds specifically at San Ciprian and more broadly, how you're thinking about that? Thank you.
Roy Harvey, CEO
Sure, Curt. Let me share some data points. First, regarding San Ciprian, we indicated that the site, including the refinery and the smelter, would experience around a $100 million EBITDA hit in the fourth quarter. This is due to two factors: one is the strike, which has a smaller impact, and the other, more significant factor is the energy costs. We're assuming an energy cost of about EUR200 to EUR210 per megawatt-hour in Spain. The energy costs in Europe are not conducive for smelting operations. Looking at the rest of our portfolio, as you mentioned, we have some fixed-price agreements, some self-generation, and roughly 50% of our operations are LME linked, which means they benefit as LME prices increase. Additionally, we have some spot pricing agreements in Norway. To summarize, for the fourth quarter, we expect about a $50 million negative impact from energy costs, broken down into $30 million from our Brazil hydros, where prices and volumes are likely to decrease, and a $20 million impact from energy costs outside of San Ciprian. However, stepping back, the aluminum segment is anticipating better shipment volumes in the fourth quarter, and we plan to offset higher raw material prices, particularly in coke and pitch. We expect improved volumes for both the alumina and aluminum segments in the fourth quarter.
Curt Woodworth, Analyst
Super helpful. Thank you, guys.
Roy Harvey, CEO
Thanks, Curt.
Operator, Operator
The next question comes from John Tumazos of John Tumazos Very Independent Research. Please go ahead.
John Tumazos, Analyst
Congratulations on all the good times.
William Oplinger, CFO
Thanks, John.
James Dwyer, Vice President of Investor Relations
Thank you, John.
John Tumazos, Analyst
Thank you. The first question is the LME aluminum contract as references at 477 for the spot and 479 for the various future months. It's not perfect, but it's a reasonable benchmark, given all it's been rising dramatically in the last 6 weeks or so. Given the time lags, is 400 too aggressive a guess for the December quarter realization for alumina? First question.
William Oplinger, CFO
John, we typically try to stay away from guesses of pricing in any particular quarter, but ASI pricing today is sitting at around $482 per ton. If I could give you a little bit of a view on the market and then you can draw your own conclusion around pricing. We have seen some curtailment of production of refineries in China for all the same reasons that you're reading about in other areas with power cuts and focus on emissions, coupled that with a very short Atlantic market because of the Jamalco shutdown where they had the powerhouse fire. That has shortened up the Atlantic market. And also, we had the Alumar ship unloader issue, which is back up and running, not the unloader itself, but the plant is back up to about 95% capacity. So combined the two of a China shortage and a short market in the Atlantic and alumina prices are running up fairly quickly. And as you know, unlike the aluminum market, there is no inventory or very little inventory of alumina. So, in the case of a short market of alumina, you typically see very quick and can see very drastic changes in pricing.
John Tumazos, Analyst
Thank you. For my second question, I analyzed the third quarter price revenues, calculated by subtracting EBITDA from the total and dividing by the tons of gas. I found that for the third quarter, the price was $2.34 per ton, which is an increase from last year's average. The alumina price was $33 a ton, and aluminum metal was PS0.15. Based on your guidance, I assume all of these figures continue to rise.
William Oplinger, CFO
Let me just take on one market at a time. And on the Bauxite side, we're largely internally sourced on Bauxite. And year-over-year, we had a change in Bauxite pricing that lowered Bauxite pricing into the alumina business. We've shown that during the course of the year. That's what's being reflected in some of the Bauxite segment results. We just talked about the strength of the aluminum markets and the aluminum markets, given the two factors that I just discussed, are very strong. And then, on the aluminum side, I think Roy highlighted it pretty well, what's going on in the aluminum business. So, each of those markets, at this point, with maybe less emphasis on Bauxite is in a pretty good situation for us.
John Tumazos, Analyst
Though I was referencing the cost per ton or pound.
William Oplinger, CFO
Yes. I was trying to convey that we should not expect any cost increases for Bauxite to alumina because bauxite costs are actually lower this year for alumina production. However, we are observing some price hikes on the refining side, which does have an impact. In terms of smelting, it's affected by both energy costs and raw materials, and we have noticed some increase in raw materials during the third quarter, with slightly more expected in the fourth quarter. Nevertheless, as I mentioned earlier, we believe that the volume benefits we will achieve in the fourth quarter will compensate for these increases.
John Tumazos, Analyst
Thank you very much. It's so great to see things so good. Thank you.
William Oplinger, CFO
Thanks, John. Nice to have you here.
Operator, Operator
My final question will come from Michael Dudas of Vertical Research. Please go ahead.
Michael Dudas, Analyst
Good afternoon. I appreciate you allowing me to ask a question at the end. Roy, your capital allocation strategy is quite impressive and has been well received, particularly considering the turbulent cycles we've experienced in recent years. I'm curious about long-term capital spending and growth opportunities without providing a specific budget or guidance for future years. How do these considerations align with the internal growth opportunities you mentioned? Additionally, regarding new technology, especially in high-performance applications, is there a plan to enhance capital flexibility with strong cash flows to support this in the medium to longer term? How should we approach this in the context of your overall capital allocation strategy? Thank you.
Roy Harvey, CEO
Mike, I appreciate the question. There's always space to squeeze you in. So, I think when we step back and we think about where we find ourselves today, it's certainly been a very different situation than 18 months ago. We have opportunities that sit inside of our three businesses. And so, Bauxite, we obviously have the ability to create if we find the pricing environment is supportive or again if we can use that internally in one of our refineries. We have a series of medium-sized growth projects, not brownfield, but sort of large creep projects inside of the refining business in Brazil and Western Australia that we continue to evaluate. For those, we need to have both the capital costs and an operating cost, but also, a revenue side that we can feel confident that we're going to get the returns on it. On the smelting side, and we talked already a little bit about this, we have opportunities to create the current assets. So those things I think are somewhat predictable. I think we can explain them very well. I think your question gets to what comes next. And to me, we've got ELYSIS is going on. ELYSIS is going to be this revolutionary technology that once proven, I think will set the stage for a brand-new way to smelt. And then we'll have the option of whether we choose to commercialize that in the external market, or whether we use it to move very quickly inside, to retrofit, or to build that next smelter. And very much depends on what's happening in the broader market, of course, but also, on us meeting the commitments around cost savings and capital cost efficiency. We're also working on Mechanical Vapor Recompression inside of refining. Today, we have the lowest carbon efficiency in all of the refining systems. So, we're very advantaged when it comes to carbon content inside of what we produce. But if we can also solve how to electrify pieces of that refining process and be able to do that in a cost-efficient and competitive manner, it starts to unblock what we can do on the refining side as well. And so, I think the way that the world is structurally moving, yes, it's great to see the structural shift in the supply-demand coming in smelting and alumina because I think that helps us to feel that this cycle can last longer. But also, when you add in the ESG trends that are happening right now, I think we have an opportunity given our legacy, given our technology, and given what we know about refining and smelting, to really take a big step forward. And what I can assure you is that we'll bring you along for that ride and talk to you about that as time goes forward. So right now, what I'd say is what we've got are really a good set of creep projects and we'll keep you informed as we approve those or as we decide to move forward on them. And then we're working on the rest of these items as well and more to come, Mike.
Michael Dudas, Analyst
Look forward to that, Roy, if we can hire a truck to take us. Thank you.
Roy Harvey, CEO
Perfect.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference over to Roy Harvey for closing remarks.
Roy Harvey, CEO
Good. Thank you, Andrea. So, Bill and I have enjoyed talking to you today. Our entire executive team and the thousands of employees across our global operations are proud of the work that we're doing. What we do matters. Aluminum is strong, light, recyclable, the right material for a sustainable future; and we are the right Company to deliver. Next month will mark our 5th anniversary as an independent Company, and we've made significant progress over that time. We're excited to talk about how we'll leverage this strong foundation for the future. And we'll give you a better answer, Mike, on November 9th, when we plan to hold a Virtual Investor Day. At that event, I'll be joined by other members of my executive team to discuss various topics, including our markets, strategies, and the technologies that we envisioned for the future. The specific details for that Investor Day event will be shared by a press release next week. So, I look forward to talking we've met with many of you soon at that upcoming event on November 9th. And until then, thank you once again for joining our call today, and please stay safe and healthy. Good night.
Operator, Operator
The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.