China’s record aluminum exports are a drag on price recovery. U.S. aluminum prices are down 22% since the start of the year. Spot prices are now six cents a pound above prices in China, a significant decline in price spread from 26 cents a pound in fourth-quarter 2014, which should reduce incentive to exports for Chinese producers. However, lower spread has thus far failed to deter Chinese exports. Chinese capacity expansions (year-to-date June production up 18% year-over-year, June up 23% year-over-year, per International Aluminium Institute) have driven aluminum exports to new highs (year-to-date June exports up 35% year-over-year, June up 35% year-over-year), sparking protests from producers elsewhere.

Morgan Stanley’s Commodities team believes that with current prices deep into the cost curve, production cuts are likely, but government support is delaying the rebalancing process. We estimate that at current aluminum prices, Century will burn cash and some production cuts might be needed.

Our new price target is based on 5.6 times our new lower 2016 Ebitda estimate. We have shifted base year for valuation by one year. One-year forward-valuation multiple is 0.2 times turn lower than before (due to lower free cash flow), but well within the historical range. Century has historically traded in the 3.7 times-8.7 times range.

Due to a two-month lag in pricing in Century’s aluminum sales, second-quarter earnings should not see the full negative impact of the second-quarter collapse in pricing. We are below consensus for the second quarter. We believe a continuation of cost reductions seen at Hawesville, Ky., in the first quarter and lower spot alumina prices represent $8 million upside to our estimate. If prices do not recover, third-quarter Ebitda could be negative. Some capital-expenditures/cost-cut announcements are possible in second-quarter results.

-- Judson E. Bailey

-- Daniel Cruise

-- David Cheng

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