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Before discussing Alcoa, let me address the big kahuna in the room - why the gap in publishing? I was sidelined due to hospitalization and thus unable to perform research, and thus not able to publish. I have now been given the all clear and am fully healthy. The Orca Fin will resume normal publishing after this force majeure event. That said, I would like to thank my loyal premium members for having faith in me and continuing to support this blog.
Alcoa - The Narrative
While identifying the narrative and arriving at numbers - more so valuations - is a recommended approach, when the narrative becomes a generational opportunity, putting numbers around it is hard. Hence, this post will be mostly narrative rather than focusing on valuations. Let’s dive in.
From 2002 to 2007, we witnessed a major bull run in commodities, which was mostly China-driven. GFC derailed that whole rally and then some, and since then, commodity stocks have been languishing. This time, the basic narrative is an AI and EV powered rally in base metals, specifically aluminum.
Aluminum, due to its light weight, improves vehicle efficiency. Also, aluminium batteries, either through substitution or fully ionized - due to their flexibility and durability - once mainstream - promise to recharge faster, be longer lasting, and more durable. Even now, EV battery packs extensively use aluminum.
If that were not enough, Aluminum will become a game-changer in microchip production due to its exceptional thermal conductivity and electrical properties. These characteristics make aluminum more than ideal for dissipating heat in high-performance intensive computing environments. As AI moves towards inference and real-world applications, the demand for Aluminum is expected to soar.
Thus, Alcoa (AA).
Now, some naysayers will point to short-term headwinds. Differences in opinion are what make a market. So, let’s address some of those concerns.
Competition for Electricity
AI datacenters’ hunger for electricity is leading to soaring electricity prices across the globe. As the demand for electricity increases, it would constrain the ability of aluminium producers to secure power at reasonable prices, so goes the bearish narrative.
This can be countered in a few ways. First, without enough aluminum, there is no AI. Classic chicken and egg conundrum. However, in the short term, Alcoa wouldn’t be constrained for electricity for two reasons.
First is Alcoa’s energy facilities and sources. Here is a note from the 2025 10K (PDF Page 8).
Electricity contracts may be short-term (real-time or day-ahead) or years in duration, and contracts can be executed for immediate delivery or years in advance. Pricing may be fixed, indexed to an underlying fuel source or other index such as LME, cost-based, or based on regional market pricing. In 2025, Alcoa generated approximately 11 percent of the power used at its smelters worldwide and generally purchased the remainder under long-term arrangements.
Now, consider the following quote from the Q4 2025 earnings call.
So remember that we have three different product lines: bauxite, alumina, and aluminum. At this point, we do not have greenfield expansion plans for aluminum, and we've not found anywhere around the world that provides a sufficiently low energy price for sufficient returns on a greenfield plant at this point. In the case of refining and bauxite, it's very similar. Refining capital costs are still fairly high, and certainly at today's prices, it makes it difficult for a greenfield expansion. Now, with that said, we do have brownfield opportunities to potentially grow in both mining, refining, and smelting. But at this point, we don't have significant greenfield plans going forward.
Getting back to the point of AI players outbidding aluminum producers for electricity, one can counter that if AI players are willing to outbid for electricity, why wouldn’t they also outbid for aluminum, effectively negating the input cost pressures? Now, one only needs to look at Alcoa’s pricing strategy. Consider the following excerpt from the 2025 10K (PDF Page 7)
Contracts for primary aluminum vary widely in duration, from multi-year supply contracts to spot purchases. Pricing for primary aluminum products is typically comprised of three components: (i) the published LME aluminum price for commodity grade P1020 aluminum, (ii) the published regional premium applicable to the delivery locale, and (iii) a negotiated product premium that accounts for factors such as shape and alloy.
Global Competition
The other bearish narrative going around is increased competition from Canada, Indonesia, and, obviously, China. Fair enough. So, let’s address them.
Canada
Consider the following question from the Q4 2025 earnings call.
Bill and Molly, thanks very much for the update. Just a couple from me. So firstly, I just wanted to dig a little more into the Section 232 Canada tariff case. Can I ask, in a scenario where there is a preferential rate agreed at some point, what is your expectation for how the Midwest Premium might react?
Alcoa masterfully addressed this question.
In theory, the Midwest Premium, if there were a preferential tariff between Canada and the U.S., in theory, the Midwest Premium should not fall. And the reason why that is, is if all the metal from Canada were to continue to come into the U.S. on a preferential tariff, you still need to incent metal to come from outside of North America. And so in theory, that should not fall.
Now, I keep reiterating, in theory, it's hard to determine what the sentiment would look like, but we believe that the marginal ton still comes from outside of North America.
Indonesia and China
I will let the following quote from the Q4 2025 earnings call speak for itself.
Going into 2026, Indonesia is emerging as a major aluminum producer, with analysts forecasting approximately 700,000 metric tons of new production. However, recently announced disruptions in Iceland and Mozambique could remove over 550,000 metric tons from the market in 2026, almost offsetting the expected additions from Indonesia and limiting net global supply growth. China remains near its 45 million metric tons cap, which we continue to believe will be maintained.
On 2026 demand, we anticipate continued growth globally, including in North America and Europe, which will remain in substantial deficits.
Alumina and Bauxite Pricing Pressures
As highlighted above, alumina and bauxite are the two other product lines apart from aluminum for Alcoa. Some pricing pressure is expected; however, the concerns are overblown.
Looking ahead, incremental supply from expansion projects in China, Indonesia, and India, combined with potential lower demand from the Mozal smelter, may continue pressuring prices. However, anticipated smelting capacity growth, primarily in Indonesia, could provide some demand support over the second half of 2026.
Turning to bauxite, prices remained relatively stable throughout the fourth quarter amid limited spot activity. However, despite strong demand, we have observed lower prices to start the year, with supplies increasing in Guinea as restarted capacity from suspended licenses comes to market.
Despite near-term market pressures, we remain confident in the long-term fundamentals of the alumina industry. Alcoa is exceptionally well-positioned to navigate market volatility thanks to our low-cost mining and refining portfolio and our strong operational performance.
Verdict
The narrative is clear: Alcoa stands to be a major beneficiary of the AI revolution for years to come. While Alcoa may face short-term headwinds as it navigates the volatility inherent in commodity markets, it stands to benefit in the long term and, along the way, reward patient shareholders.
The two price levels to watch for Alcoa are 70 and 100 in the short term. A breakout above 70 leads to a straight path to 100, and the real party starts above 100.
The verdict is simple: buy and hold.
A few other thoughts
META is at it again with another restructuring. I spent quite a bit of ink on the last one over 2024 and 2025 to the point of calling Mark Zuckerberg “Chainsaw Mark” Zuckerberg after the infamous “Chainsaw Al” Dunlap. While I rode the rally, I subsequently ticked the intermediate top as the benefits of the restructuring were baked in. Let’s see what happens this time. Continuously restructuring and dumping the costs below the line to boost the income statement goes as far as it can because soon enough, the chickens will come home to roost.
NVIDIA’s go-go days seem to be coming to a temporary halt as the market responded quite mutedly to the narrative set by Jensen Huang at the GTC event. While Huang’s narrative will play out, we are no longer in the cheap liquidity environment.
S&P Global (SPGI) got hammered after its recent earnings release. The stock has not done much since 2022, as it is now below the highs made back then. SPGI remains a solid stock and will unlock some shareholder value in the middle of 2026 when it spins off its mobility business. The ongoing turmoil in private credit will slowly but surely put the ball back in SPGI’s court and eventually boost its credit rating business. And then AI-powered competition is talk, just that, talk, as if SPGI is sitting on its hands and not enhancing its capabilities. SPGI would make an interesting addition to the portfolio here.
Base metals rally will continue as long as there is no recession, which is unlikely at this time. Then, again, the Fed is on standby to cut rates and pump in liquidity in the event there is a whiff of trouble. The playbook has been made all but clear over the past decade and a half.
While SMCI was my homerun trade of 2024, when I warned about it in May 2024, even before Hindenberg Research got to it, DUOL is the 2025 trade for this blog. Since I first warned about DUOL at 530, it is down 80% to around 100. Saved some people a lot of capital, didn’t I?
Finally, again, I would like to thank my long-term premium subscribers for their continued patronage.
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