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This afternoon in metals news, renegotiation efforts focused on the North American Free Trade Agreement (NAFTA) appear to be at a standstill, Chile’s state copper commission boosts its 2018 copper forecast and a European agency advises plane manufacturers to suspended their use of products from embattled Japanese steelmaker Kobe Steel.

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NAFTA Deadlock

The fourth round of renegotiation talks regarding the 23-year-old NAFTA concluded yesterday, but the U.S., Mexico and Canada appear to be no closer to a consensus.

According to Bloomberg, initial hopes for a quick resolution have fizzled, as talks will now be extended into 2018 (which was previously hoped to be avoided, given the scheduled elections in each country next year).

The next round of talks is scheduled for Nov. 17-21 in Mexico.

Cochilco Forecasts Copper at Nearly $3/Pound in 2018

Chile’s state copper commission, Cochilco, on Wednesday put out a forecast for 2018 including a prediction of the average global copper price hitting $2.95/pound.

The new forecast is up significantly from Cochilco’s mid-year estimate of $2.68/pound. Greater Chinese demand is cited as a supporter of the global price.

Kobe Steel Saga Continues

The fallout from the Kobe Steel data falsification scandal continues, as the European Aviation Safety Agency (EASA) advised plane manufacturers to suspend their use of products from the firm, the third-largest steelmaker in Japan, according to CNN Money.

According to the report, EASA advised those manufacturers to find alternative suppliers and conduct a “thorough review of their supply chain.”

Free Download: The October 2017 MMI Report

A number of global heavyweights use Kobe Steel products, including GM, Boeing, Ford and Toyota, according to the report.

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The United States International Trade Commission last week announced it is launching an investigation related to the importation of something that is often considered the wave of the future: automation systems.

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The USITC announced it launched a Section 337 investigation last Wednesday. Section 337 of the Tariff Act of 1930 determines whether there is unfair competition in the importation of products into, or their subsequent sale in, the United States, including the infringement of a U.S. patent, copyright, registered trademark or mask work.

The investigations stems from a complaint filed Sept. 6 by Rockwell Automation, Inc., of Milwaukee, Wisconsin.

“The products at issue in the investigation include components used in the complainant’s industrial automation systems that bear the complainant’s Allen-Bradley® trademarks and that use the complainant’s copyrighted software and firmware,” the USITC announcement reads.

According to the complaint, the respondents allegedly violated Section 337 with respect to the importation and sale of “certain industrial automation systems and components thereof including control systems, controllers, visualization hardware, motion and motor control systems, networking equipment, safety devices, and power supplies that infringe trademarks and copyrights asserted by the complainant.”

In addition, Rockwell is asking for a general exclusion order, and cease and desist orders.

The following firms were listed as respondents in the case:

  • Can Electric Limited of Guangzhou, Guangdong, China
  • Capnil (HK) Company Limited of Hong Kong
  • Fractioni (Hongkong) Ltd. of Shanghai, China
  • Fujian Dahong Trade Co., Ltd., of Fujian, China
  • GreySolution Limited d/b/a Fibica of Hong Kong
  • Huang Wei Feng d/b/a A-O-M Industry of Shenzhen, China
  • KBS Electronics Suzhou Co., Ltd., of Shanghai, China
  • PLC-VIP Shop d/b/a VIP Tech Limited of Hong Kong
  • Radwell International, Inc., d/b/a PLC Center of Willingboro, NJ
  • Shanghai EuoSource Electronic Co., Ltd., of Shanghai, China
  • ShenZhen T-Tide Trading Co., Ltd., of Shenzhen, China
  • SoBuy Commercial (HK) Co. Limited of Jiangsu, China
  • Suzhou Yi Micro Optical Co., Ltd., d/b/a Suzhou Yiwei Guangxue Youxiangongsi d/b/a Easy Micro-optics Co. LTD. of Suzhou, Jiansu, China
  • Wenzhou Sparker Group Co. Ltd., of Wenzhou, China
  • Yaspro Electronics (Shanghai) Co., Ltd., of Shanghai, China

Free Download: The October 2017 MMI Report

USITC rules dictate that it will issue a target date for completion of the investigation within 45 days of launching one, meaning the Commission will set a target date by Nov. 25 in this case.

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This morning in metals news, U.S. raw steel production went up last week, aluminum is heating up as China prepares for winter cuts to excess capacity and Kobe Steel’s data falsification scandal could stretch back a decade.

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Raw Steel Production Up 5.4%

U.S. raw steel production for the week ending Oct. 14 was up 5.4% from the same week in 2016, according to weekly data from the American Iron and Steel Institute (AISI).

Production for the week amounted to 1,744,000 tons, up from 1,655,000 for the same time frame in 2016.

Aluminum Heating Up

It’s been a big year for aluminum — and with Chinese winter cuts to excess capacity on the way, the aluminum price could continue to rise.

According to a Reuters report, China is preparing to reduce its aluminum smelting capacity by one-tenth by the end of the year.

Kobe Steel Scandal Could Go Back More Than 10 Years

The data falsification scandal plaguing Japan’s third-largest steelmaker could go back more than a decade, according to a Bloomberg report.

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According to the report, Kobe Steel will cooperate with the U.S. Department of Justice. A company executive quoted in the report told Bloomberg that data falsification at the firm has likely been happening for over a decade — stretching further than Kobe’s admission of falsification dating back to 2007.

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The World Steel Association released its October 2017 Short Range Outlook (SRO) — its assessment of the global steel market — on Monday.

For the most part, the latest SRO relates good news for the global market.

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“In 2018, we expect global growth to moderate, mainly due to slower growth in China, while in the rest of the world, steel demand will continue to maintain its current momentum,” said T.V. Narendran, chairman of the World Steel Association’s Economics Committee, in the report.

According to the SRO, global steel demand will reach 1,622.1 million tons (Mt) in 2017 and 1,648.1 Mt in 2018. Excluding China, demand is expected to grow 2.6% this year and 3.0% next year.

Dr. Nae Hee Han, the World Steel Association’s director of economic studies and statistics, wrote on Monday that while the numbers in the SRO are mostly positive, there are a few caveats.

First, she wrote, the growth of emerging economies did not meet previous SRO estimates set in April.

“A number of emerging economies did not perform as well as expected in 2017 due to short term disruptions caused by ongoing reform initiatives or political factors,” Nee Han wrote.

On the other hand, developed economies — the European Union, Japan and the United States — performed better than expected. But Nee Han explains that emerging economies will experience greater growth in 2018, partially as a result of reform initiatives, including the Goods and Services Tax (GST) system in India, energy and tax reform in Mexico, exchange rate reforms in Argentina and Egypt, and fiscal reforms in GCC countries.

As for the sustainability of the current growth trend, Nee Han writes that it might not be a long-term thing.

“Secondly, the worldsteel Economics Committee at its most recent meeting in Amsterdam a month ago was in agreement that the current momentum is driven mostly by cyclical rather than structural factors,” she wrote. “We do not find the improved growth figures to be sustainable in the long term: China’s continued deceleration, megatrends such as aging populations, a shift to a circular economy and increasingly stringent environmental regulations continue to weigh against steel demand.”

Another optimism-mitigating factor listed by Nee Han is the statistical anomaly that is China’s 2017.

“In 2017 China closed most of its illegal induction furnace capacity, which up until now had not been included in official statistics,” Nee Han explains. “With this closure, the demand satisfied from these producers is now being met by the official sector. This shift of demand explains the forecasted jump in the Chinese growth rate in 2017 – the technical effect of the underestimated 2016 base.”

Around the World

Demand for finished steel is variable around the world, but, for the most part, is forecasted to increase this year and next in most regions.

In the North American Free Trade Agreement (NAFTA) bloc, there is an expected 4.9% year-over-year increase in demand (or 138.7 Mt) and 1.2% increase in 2018 (140.4 Mt).

Meanwhile, the report forecasts a 2.5% jump this year in the EU (162.1 Mt) and 1.4% increase next year (164.3 Mt).

In the Commonwealth of Independent States (CIS) bloc, which includes Russia, there is an expected 3.6% increase in 2017 (51.1 Mt) and 3.8% next year (53.0 Mt).

In the Asia and Oceania region, there is an expected 9.3% growth in 2017 (1,098.8 Mt) and 1.1% in 2018 (1,111.1 Mt).

In Africa, there is an expected 1.6% drop in demand this year (37.0 Mt) and a 3.3% jump next year (38.2 Mt).

In Central and South America, the report forecasts a 2.5% jump this year (40.4 Mt) and 4.7% jump next year (42.3 Mt).

Construction and Automotive Sectors

What about industry sectors, like construction and automotive?

According to the SRO, construction growth in developed countries, which has been relatively slow since the 2008 economic recession, is “now showing more positive signs both in the residential and commercial sectors due to rising incomes and improving investment sentiments.”

Free Download: The October 2017 MMI Report

As for the automotive sector, the report states that despite a strong 2017 overall, growth could moderate in the U.S. and China, a trend that is “likely to extend to other countries in 2018.”

What Went Wrong at Kobe?

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Few topics, apart from metal prices of course, prompt more debate in the office of MetalMiner than supply chain issues.

So it should come as no surprise that hot on the heels of our article reporting last week’s news regarding Kobe Steel’s admission of falsifying quality data should be a more in depth analysis of what exactly went wrong — and, maybe more importantly, why it went wrong.

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The “what” is still difficult to pin down.

On the one hand, many sources, even highly respected sources like The Economist, say products were certified as having properties – such as a level of tensile strength – that they did not in fact possess.

Yet this does not square with the response of many of Kobe’s customers.

Aerospace firms like Boeing and Mitsubishi Heavy Industries who used affected products on the recent H-2A satellite launch vehicle, and automotive clients like Toyota, Honda, Nissan, Ford and GM, have variously said their preliminary findings are no material exhibiting properties outside of the standards has been used.

If that is the case (and it is still early days), what we could have is a case of incorrect procedures being employed, such as Nissan’s recall of 1.2 million cars after finding unqualified inspectors had been conducting safety checks.

Bloomberg explored the ongoing threat of substitution of steel with aluminum in automotive applications and the transport industry’s relentless pursuit of lower weight – and hence thinner materials – as somehow a reason for Kobe Steel falsifying data. But there is no evidence the quality issue has anything to do with weight reduction, or specifically new, thinner grades of steel.

The Money Argument

One angle in trying to understand why it happened is to follow the money.

There could be an argument that quality control can be the first casualty of a firm struggling for profitability. Kobe has not fared well in the face of a highly competitive international steel market, particularly in Asia.

As this chart courtesy of Morningstar shows, the share price has been in decline since the start of the decade.

Source: Morningstar

Without focusing on the 30% decline in the last week, the firm has been making rising losses in 2015 and 2016, although part of this has been down to provisions against bad debts according to the latest company accounts.

Could cost-cutting have been to blame? Possibly. Bloomberg quotes a spokesman for the company who said pressure to meet delivery deadlines was one reason behind the failure. But as the firm has said the falsification involves only 4% of its shipments, between September 2016 and August 2017.

The fact that there have been no specific reports of defective parts and no carmakers have yet to issue recalls or warnings to stay off the road could be just a case of luck that defective parts have gone to less critical applications or it could be that end users have run their own assessment and concluded chemical and mechanical properties met minimum standards. The period quoted does correspond to the loss-making period at Kobe, but does not square with admissions made by the firm.

A Reuters report article stated “Kobe had fabricated data to show its products met customer specifications” when in fact the material did not. It also quoted the company in saying “The misconduct involved dozens of staff and possibly stretched back 10 years.” That would not have passed multiple audits and inspections, not just by ISO but even more rigorous audits by automotive and aerospace end users. These statements, though, are general admissions and do not specifically state what was hidden or changed.

A Culture Issue?

Back to The Economist, who quote Toshiaki Oguchi of Governance for Owners Japan, a corporate-governance lobby group, who said “Japanese workers are ethical, but tend to hide wrongdoing rather than confront management. Kobe Steel ignored at least one whistle-blower who sounded the alarm over its substandard metal.” Maybe what we have here is a cultural issue, a minor non-conformance was covered up or divergence from the standard procedure was allowed to happen, no one was reprimanded, it happened again and over time so that gradually circumventing proceedures became common practice.

A report in the Japan Times just prior to the weekend supports this position, cataloguing both corporate wrongdoing and quality issues. For example, in 2006, Kobe was involved in a data fabrication scandal after an internal investigation found that data on soot and smoke released by one of its plants had been falsified frequently over a period of 30 years. In 2008, Kobe Steel subsidiary Nippon Koshuha Steel Co. was found to have cheated on steel inspection data. In 2016, shoddy legal compliance led to another quality-control issue at subsidiary Shinko Wire Stainless Co.

Both affiliates were listed among the data falsifiers in this year’s scandal.

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The Japan Times went on to say production units skipped inspections and engaged in unspecified data fabrication because they were under pressure to meet delivery dates and win more orders, leading to compromises on quality.

So much for kaizen and Japan’s much-lauded pioneering adoption of Deming’s principals of quality improvements.

This situation illustrates the clash of two cultures, the open culture of continual improvement which demands a no-blame admission of every failing in the interest of rectifying and improving, coming up against a corporate culture in which executives could not admit failure to meet internal deadlines.

In this clash, quality lost.

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This morning in metals news, Kobe Steel’s share price continues to plummet in the wake of its data falsification scandal, London copper hits a three-year high and palladium is having a strong 2017.

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Kobe Steel Shares Hit Lowest Price Since 2012

Kobe Steel, Japan’s third-largest steelmaker, continues to see its share price drop on the heels of its data falsification scandal.

The fallout from the scandal has already seen Kobe lose approximately $1.8 billion in market value, Reuters reported.

On Friday, Hiroya Kawasaki, Kobe’s chief executive, said about 500 companies received falsely certified products from Kobe, which was more than double a previously released number, according to the Reuters report.

LME Copper on the Rise

London copper is on the way up again, this time rising to hit a three-year high, Reuters reported.

The metal eclipsed the $7,000 mark, powered in part by good news on the Chinese economy, according to the report.

Palladium Powered by Automotive Demand

Recently, the palladium price recently eclipsed that of platinum for the first time in 16 years.

It’s been that kind of year for palladium.

Free Download: The October 2017 MMI Report

According to a CNNMoney report, 78% of palladium demand this year came from the automotive market.

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Trade negotiators from the U.S., Canada and Mexico are back at it again, working to tweak — or in some cases, totally alter — the North American Free Trade Agreement (NAFTA).

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Representatives from the three countries came together beginning last week for the fourth round of talks focused on the renegotiation of NAFTA, the 23-year-old trilateral trade deal.

The talks started Oct. 11 in Arlington, Va., and are scheduled to continue until Oct. 17.

U.S. Trade Representative Robert Lighthizer issued a statement opening the fourth round of talks.

The officials are scheduled to work on two dozen discussion topics during this round of talks, and recently finished a chapter on competition. According to a USTR release, the updated NAFTA Competition Chapter “goes beyond anything the United States has done in previous free trade agreements.”

“I am pleased to welcome back Secretary Guajardo, Minister Freeland, and their teams to continue negotiations here in Washington,” Lighthizer said in the prepared statement. “Thus far, we have made good progress, and I look forward to several days of hard work.”

Even so, cracks seem to be forming in the dialogue that threaten the stability of the talks and, consequently, the agreement.

As has been mentioned before, President Donald Trump reportedly nearly withdrew the U.S. from the trade deal in April until talks with the Mexican and Canadian leaders convinced him otherwise.

In recent months, Trump has resumed with threats against the deal, which he once called possibly the worst trade deal ever. Renegotiating the deal has always been a primary goal for Trump, with the understanding that should a favorable deal fail to materialize, he would withdraw the U.S. from it.

So far, the threats to withdraw from the deal have been just that: threats.

However, those threats have seemed to pick up as negotiations have continued. And when it come to negotiations, reports indicate a number of the U.S. delegation’s proposals are not going to go over well with their fellow NAFTA partners.

On Thursday, Reuters reported that the U.S. negotiating team suggested any approved deal should include a five-year sunset clause, meaning the deal would have to be effectively re-approved by all three countries in five years or it dissolves.

Naturally, this has a number of stakeholders feeling nervous, as such a sunset clause, businesses argue, creates uncertainty. With increasingly interconnected and entrenched supply chains, business interests view a sunset clause as a non-starter, as do Canada and Mexico.

In other policy proposals, Reuters reported Friday that the U.S. is pushing stricter rules on automotive content, particularly with respect to aluminum, steel, copper and plastic resins, in an effort to up the level of automotive materials sourced in North America.

As the talks continue, United Steelworkers again urged the administration to consider workers.

“It’s no surprise that business groups are concerned that NAFTA’s outsourcing provisions may be dramatically altered, and that provisions might be included to develop an agreement that is fairer to workers,” a USW release last week said. “Organized labor is working with the Administration to advance proposals that will promote growth and opportunity for workers in all three countries. A deal that achieves those goals would be worthy of our support.

“Businesses have set the agenda for far too long and the result has been rising trade deficits, lost jobs, devastated communities and rising income inequality.”

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The talks are scheduled to wrap up tomorrow, Oct. 17. According to the USTR, a trilateral press event including Lighthizer, Canadian Foreign Affairs Minister Chrystia Freeland and Mexican Secretary of Economy Ildefonso Guajardo Villarreal.

If you were in India right now, someone is bound to tell you that it’s that time of the year.

He or she would be referring to the almost-three months of festivals and wedding season, which India sees starting from sometime late August and continues until early September. More specifically, just under a week remains before that “mother of all Indian festivals” — Diwali, the fest of lights.

All this also means an uptick in shopping, but, more specifically, gold shopping.

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Indians love their gold, and any excuse is enough to buy some more of the yellow metal. But Dusshera (a major Hindu festival preceding Diwali) and Diwali are special occasions, reserved for buying as much gold as possible. All of this makes India the second-largest gold-consuming market in the world.

This year, there was a slight damper on Indians’ demand for gold.

As part of the new tax reforms, the government included jewelers in the Prevention of Money-Laundering Act (PMLA) in August. This meant a compliance requirement on part of the buyer for any purchase above US $760 (Rs 50,000), including providing their income tax identity.

Incidentally, gold and real estate are the two investment opportunities that were often misused by hoarders of cash or those dealing in the black economy.

For some time, then, there were no “high value” deals as jewelers across the country, their associations and potential customers protested.

So, while September import figures of gold (in the month of Dusshera) were robust, they could have been even higher if the PMLA was not in effect, some associations claimed.

According to a report put out by news agency Reuters, India imported 48 metric tons, equivalent to $2 billion at today’s prices, in September. But since Dusshera fell in September instead of October this year (it follows the lunar calendar), the import figures compared to September 2016 were up, though on a month-on-month basis, it was lower, because of the uptake being down due to the PMLA.

But a decision by the government a few days back has brought back the cheer in the lives of gold consumers in India.

The PMLA has been put on hold for now, which means people can go ahead and buy gold without providing any of the previously required documents. Jewelers are hopeful the gold-buying spree, normally seen during these festive months, will at least revive in October, especially around Diwali. Imports are expected to go up to about 70 metric tons per month.

Just to give readers an idea of Indians’ love of gold, Indian households have the largest private gold holdings in the world, standing at an estimated 24,000 metric tons. That figure reportedly surpasses the combined official gold reserves of the United States, Germany, Italy, France, China and Russia.

This year, even the Indian government wants to take advantage of the festive gold bonanza.

Showing impeccable timing, it has announced the launch of new sovereign gold bond schemes. Never before has such a scheme been announced around festival time.

Free Download: The October 2017 MMI Report

The bonds issue opened Oct. 9 and remain so until Dec. 27, covering the festivals of Diwali and Christmas.

The government has also made important changes to attract high-value investors, raising the annual investment limit per person from 500 grams to 4 kilograms. For trusts and similar entities, the limit was raised to 20 kilograms. This higher limit will make the scheme attractive for high-net-worth individuals who had not participated in earlier schemes, as they found the 500-gram limit to be too low.

Before we head into the weekend, let’s take a look back at the week that was. 

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  • In case you missed it, our October MMI report is out. Make sure to check out the free PDF download for the rundown on the last month for our 10 MMI sub-indexes: Automotive, Construction, Aluminum, Copper, Renewables, Rare Earths, Raw Steels, Stainless Steels, GOES and Global Precious.
  • Also, our Annual Outlook is out, too. Check it out for a comprehensive look ahead to 2018.
  • Coal India Ltd. is looking to diversify beyond coal, Sohrab Darabshaw wrote earlier this week.
  • Aluminum officials are in “wait-and-see mode” when it comes to the ongoing Section 232 probe vis-a-vis aluminum imports. The investigations into the national security impact of aluminum and steel imports were launched in April and have a January statutory deadline; at that point, Secretary of Commerce Wilbur Ross must present President Donald Trump with a report and recommendations.
  • Glencore bet big on zinc — and won, our Stuart Burns writes.
  • Although oil prices are well below 2014 numbers, supply cuts in some cases have seen the price start to climb. Are more cuts on the way, further constraining global supply and driving up prices? Burns wrote about the subject and what OPEC Secretary General Mohammad Barkindo called a “rebalancing process.”
  • In big news, Kobe Steel is in hot water for a data falsification scandal, one which threatens the firm’s credibility among consumers and manufacturers. The scandal has already had major financial ramifications, as the company’s share price has been in free fall since the news hit.

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This morning in metals news, NAFTA renegotiation talks continued with the U.S. aiming to tighten automotive content rules in favor of North American-made metals, Allegheny Technologies Incorporated (ATI) commented on its Q3 earnings and Alcoa reached an early termination agreement for a power contract tied to one of its Texas smelters.

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U.S. Looks for Stricter Auto Content Rules

Trade negotiators from the U.S., Canada and Mexico are in Arlington, Va., until Oct. 17, engaged in a fourth round of talks focused on the North American Free Trade Agreement (NAFTA).

According to a Reuters report this morning, the U.S. is seeking stricter rules for automotive content, demanding a higher percentage of the materials — including aluminum and steel — that go into automotive manufacturing should come from North America.

According to the report, the proposal — which includes aluminum, steel, copper and plastic resins — would place those materials on the auto parts tracing list for the first time in the history of the 23-year-old trilateral trade agreement.

ATI Expects Q3 Results to Meet July Outlook

ATI commented on third quarter financial results on Thursday, and announced a non-cash net of tax charge of $114 million, or $(1.05) per share, for goodwill impairment related to the Cast Products business.

“Excluding the goodwill impairment charge, we expect our third quarter 2017 results to be in line with our outlook provided in July,” said Rich Harshman, ATI’s chairman, president and chief executive officer, in a company release.

Alcoa Announces End of Power Contract Agreement

On Friday morning, Alcoa announced power provider Luminant Generation Company LLC has terminated the electricity contract tied to Alcoa’s Rockdale Operations in Texas.

The smelter at Rockdale has been fully curtailed since the end of 2008, according to the Alcoa release. The termination of the contract was effective Oct. 1.

Free Download: The October 2017 MMI Report

Alcoa expects an annual improvement to net income and adjusted EBITDA of $60 million to $70 million as a result of the contract termination, beginning in the fourth quarter of 2017.