Good afternoon, and welcome to the Alcoa Corporation Second Quarter 2018 Earnings Presentation and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

Thank you, Austin, 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 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. Also, a note on our financial statements, consistent with our first quarter earnings presentation our presentation today for the current period as well as prior periods has been updated in accordance with the Financial Accounting Standards Board’s recent change to the presentation of non-service pension and OPEB costs. This change resulted in Alcoa moving such costs out of the EBITDA and into other income expense. Finally, as previously announced, the earnings release and slide presentation are available on our website. With that, here is Roy.

Thank you, Jim. And thank you to everyone for joining our earnings call. We had a very active second quarter. We continue to address our pension liability through contributions and annuity purchases, we closed a $500 million bond offering, and we launched the joint venture to support aluminum smelting research and development. However, we also had an unexpected operational issue with our work smelter restart, as well as instability resulting in reduced alumina production versus our expectations. Amid all this activity, markets in U.S. trade policy also remain dynamic. With that backdrop, let's review our second quarter results. We reported net income of $75 million or $0.39 a share. On an adjusted basis, excluding special items, net income was $286 million or $1.52 a share. We generated $904 million in adjusted EBITDA excluding special items. While this is up 38% sequentially, there were trade actions and operational factors that affected the quarter, which also play into our lower 2018 outlook. From a cash perspective, we ended the quarter with a balance of $1.1 billion. Because safety is our first and most important priority, last quarter we began reporting on safety in our earnings presentation. Our focus is on preventing serious injuries, meaning injuries that are life altering or life-ending. In the second quarter, we had one serious incident at one of our smelters in Norway. A maintenance worker seriously injured his hand while using machinery, resulting in damage to the hand skin, muscles and tendons that may likely affect the hand's movement. There are many lessons to be learned from this incident and it reinforces our resolve to improve fatality and injury prevention. Every day, we work to ensure that everyone who walks through our doors is safe. To that end, we remain focused on managing our top risks, making…

Thanks, Roy. Let’s start with the income statement. Sequentially, revenues are up 16% on higher alumina and aluminum prices. Compared to last year, revenues are up 25% also on higher prices for both alumina and aluminum, which were up 49% and 19% respectively. In the quarter, the net income attributable to Alcoa Corporation was $75 million or $0.39 per share on a 188.7 million shares outstanding. Special items in the quarter totaled $211 million after tax and non-controlling interest, driven by three items, two were previously announced. The first is the Canadian pension annuitization settlement in April, which is $122 million after tax. And the second is the recently announced Wenatchee power contract payment at potline closure in June that was $73 million both pre-tax and after tax. The third item results from the final arbitration of a bauxite mining services contract at our now-closed Suriname mine and refinery. We paid cash of $29 million with the net earnings impact of $17 million after tax and non-controlling interest in the quarter. Our second quarter 2018 adjusted net income excluding special items was $286 million or $1.52 per share; roughly double the first quarter of 2018 and 147% higher than the prior year. Adjusted EBITDA excluding special items was $904 million, up $251 million sequentially, primarily due to higher alumina prices and up $399 million over the prior year also due to higher market prices. Our second quarter EBITDA margin was 25%. In the second quarter SG&A and R&D are down $2 million on a sequential basis and are down $5 million year-over-year. A few items to note were the EBITDA line on a sequential comparison basis. Other expenses declined $35 million, primarily due to favorable foreign currency impacts as the dollar strengthened. Interest expense increased $3 million, primarily due to…

Thanks, Bill. First, I'll begin with a look at the bauxite alumina and aluminum market. While we continue to expect 2018 deficits in both the alumina and aluminum markets we’re now projecting a larger aluminum deficit than estimated in the first quarter and see bauxite moving into surplus. Beginning with bauxite, and as noted last quarter, 2018 will likely see Chinese bauxite stockpiles grow. While our outlook for Chinese bauxite demand has increased slightly, we also expect increased supply growth in Guinea and lower demand from the world ex-China. This surplus continues to be purchased by Chinese customers to serve as operational stockpile. In the alumina market, large supply disruptions in the Atlantic continue to keep alumina supply at relatively lower levels and in deficit for the year. In China, we believe that some refineries have been operating at higher run rates incentivized by economics that made Chinese alumina exports profitable mid-quarter. We also expect China to import 500,000 tons of alumina in 2018, the smallest amount we've seen in recent history. This is due to few alumina tons available for import outside of China, as well as relative pricing between these two markets. In aluminum, we are increasing our deficit forecast for 2018 to range between 1.1 million and 1.5 million metric tons, up from last quarter's estimate of between 600,000 and 1 million metric tons. Global aluminum demand growth remains the same from last quarter projected to be between 4.25% to 5.25% in 2018. In China, we are forecasting a smaller aluminum surplus for this year as announced smelter projects are delayed by the time needed to obtain government approval for operating lags. In addition, the Chinese government has indicated its desire to further regulate coal-fired captive power plant, which if implemented could add to the power cost…

[Operator Instructions] Our first question will come from Matthew Korn with Goldman Sachs. Please go ahead.

Good afternoon, everyone. Thanks for taking my questions.

Hey, Matthew.

So, could you explain a little bit more, maybe I missed it before, but just please the issues with the alumina production where and why and whether resolved? And Bill, you may have touched on this a little bit, but where else were the operational challenges that were unexpected? Is this mostly again in the work restart?

Yeah, so there is two areas of operational challenges in the quarter, the first was on the alumina side. Couple of different plants with some operational issues, we had higher raw material usage in our Spain facility. We had lower yield than what we had hoped for in one of our Western Australian facilities and a boiler outage in a facility down in Brazil. Outside of the alumina segment, we saw a little bit of weaker performance than what we had hoped for in our work facility in part because of the loss of the line in for the restart that we had. So those are the two big operational issues experienced in the quarter.

Got it. And I see you only made a small downward adjustment in alumina side. So those are largely now behind us?

The biggest part of them was behind us in the second quarter. Part of that adjustment was a lowering in the second half also. So that's our forecast for the year.

Got it. Appreciate it. Secondly, thank you very much for outlining the tariff effect so far, and your outlook there. Do you have any dialogue with the government on this, either with the administration or those in Congress who are seeming to start to show some recognition that there are some negative effects? And then secondly, is there anything you anticipate as a spillover either good or bad on this most recent set of proposed Chinese tariffs so there's any effect along your old production chain there? Thanks.

Sure. As you can imagine, we maintain pretty active dialogue with a lot of different groups in Washington. We have active discussions with the administration and with different parts of commerce department and elsewhere. We also talk with different members of Congress, et cetera. So we have an active dialogue and what I would say is that I think they understand what we've outlined as our focus on the global industry, and also our focus on the U.S. side of the industry. And so that's something that we are constantly driving and we're constantly communicating, and constantly educating. So it's not yet resulted in where we want to be, which in the short-term are the elimination or the allowance of the Canadian exceptions on tariff. And realistically, what we really like to foster is a long-term dialogue about how we drive a much more level playing field around the world. So we keep that constant communication. The second question, remind me what the second question was.

Just on the Chinese…

Yes, thank you. On the impact of the latest round of discussions the larger potential tariff talked about from the U.S. side, and then also the retaliation from the Chinese side. There's no direct impact on the aluminum industry itself, there is an indirect impact in that it creates some questions about the general economy, could have impacts on how commodity flows and expectations about commodities. But there really are no direct impacts on us.

Appreciate it. Good luck.

Thank you.

Our next question comes from Curt Woodworth with Credit Suisse. Please go ahead.

Yes. Hi, good afternoon.

Hey, Curt.

I was wondering is there any ability for you to change the importer of record, [indiscernible], I believe you're responsible for the tariffs because of that designation, whereas, and I think a lot of other products, the trader or the consumer would be listed at that. So if you had any dialogue with your customer base around sharing the burden of the tariff. And then, there is a product exclusion process for products that can be made here, right. So it's sort of an odd situation that you as the producer would be the one to argue for that. But have you filed an exclusion request with regard to your exports with commerce?

Yes, so, a few questions in there. What you're seeing in the market is the beginnings of discussion around duty paid versus duty unpaid market. And so that's a sort of a natural process we've seen in Europe, we've seen it elsewhere. But it's a natural process that starts to make those discussions a bit more transparent. The simple fact is, is that Midwest premiums are experienced across North America, but because of the tariffs you’re really only realizing the full impact of those Midwest premiums if you produce in the United States. And so while there is a lot of discussions around that and there are specific contracts, I think the market is moving more towards the duty paid versus duty unpaid kind of methodology. On your second question. What was the second question, Curt remind me?

Have you filed a request for exclusion to be…

On the request for exclusion, yes, thanks. So we have not filed any request at this point. And we obviously keep very close to that process. It is something that we continue to analyze. And so it's obviously we would let our investors know if we were to choose to do that, but nothing filed at this point.

Okay. And then just a follow-up question on capital return, the balance sheet still fairly underlevered from the debt perspective. You raised debt to pay down the pension still generating pretty healthy free cash. Can you comment on your desire to accelerate capital return to the equity holders either dividends or buybacks. And can you just remind us of the size of your basket in terms of how much you could buyback? And then how much of that would go away if you don't utilize it this year? Because I believe there is like only a 50% carryover, which you already have. I think last year's carryover also affected this year. Thank you very much.

Yes, so I'll address that one. Specifically, the ability to return cash to shareholders is around $437 million in 2018. As you know and I think I alluded to in my comments, a lot of our cash flow generation occurs in the second half of the year. We have said publicly that we will be returning above and we have a very formulized capital return structure that focuses on having $1 billion of cash sustaining the operations paying down some of the pension liabilities. Once we've done all of that, we will return 50% of excess free cash flow to shareholders and use 50% for delevering. We'll be making those decisions in the second half, and we'll let you know when we’ve made the decision. At this point, thinking through the options between share buybacks and dividends and just don't have an answer for you at this point, but we will in the second half.

Yes, it's in active discussion in our Board. How should those capital returns look, and it's obviously a very welcome discussion and one that we're taking very seriously.

Understood, thanks.

Your next question comes from Timna Tanners with Bank of America Merrill Lynch. Please go ahead.

Great, thanks very much. Wanted to just probe a little bit more some of the comments about the broader markets. And I know in the last conference call we got you to give us some anticipation in terms of the norte restart. I was wondering if you can comment on any expectations you might have there. And with regard to RUSAL resuming normal operations?

Yes Timna, so let me hit on those two. Starting with Alunorte, we're very careful not to express opinions on how and in what method competitors are working to bring back production online. As you know, Brazil is a very complicated environment particularly right now. We do see in our operations there is increased oversight. We welcome and do a lot of work to connect with the communities and connect with the local, regional and then federal regulators as well. But it's -- have a real impact on our alumina markets today. From an outlook perspective, I'll remind you what we said last quarter is that we were assuming a six month outage. We have bumped that up now simply because more time has passed and we haven't yet seen a resolution to it. And I just want to say that we've included that as a placeholder not to try to take position about when and how that will come back on again. But rather watching a bit removed to see how [indiscernible] norte deals with that situation. On the RUSAL side, I think what we've seen is that there is a pause, there is really two aspects to this. The first is that because there is this period until October has given the market some breathing room to be able to start to adapt. That actually also coincides with when a lot of customers are looking for that next set of contracts. And so it's given the market time to adapt. So I'd say a lot of those immediate impacts at least come down a little bit, while we’re waiting to see what the final outcome will be. The second side of that is that right now I think a lot of people in the market are expecting there to be some kind of resolution to that. However, there is still a lot of caution as to whether that material, whether it’d be alumina or whether it’d be aluminum, whether that material will be available to the market. And so, that is still a story underdevelopment and we’ll see where that takes us.

Got it. I appreciate that. Obviously, difficult confusing times with regards to that outlook. But my other question is really on the bauxite market, it’s not only pretty opaque for us on the outside here and it is interesting to hear you talk about the new oversupply outlook. Can you talk to us a little bit more about how that impacts Alcoa in particular, you have -- you’ve said in the past you have a premium product. Do you still expect that premium to withstand and do you still expect to be able to grow production and plan to as you’ve talked about in the past? Thanks.

Sure. And let me start commenting and then Bill might want to chime in as well. So, from our perspective, we tend to look at our bauxite growth projects as very much tied to customers in the market. So, as we think about doing expansions, we’re very focused on who will be the final recipient of that product. And we do that because we want to be sure that we’re extracting the value for the quality and consistency in delivery particularly of those reserves. So, I would say that while the current market because of so much -- because there has been this growth of supply in Guinea, we’re careful and cautious about it. But I would say that we’re still looking towards investing in that business because from a long-term or even medium-term perspective there is a significant amount of demand in China. On the pricing side, there really is no single solution; you look at API, the alumina price index in our alumina market. There really is no single solution in bauxite yet. That is a market that is still being determined. And to a certain extent, there are some contracts that are priced with transportation embedded in pricing and others that are priced without. And so, the pricing, to be quite honest is opaque, but you also see some factors that are in the favor of positive pricing, but also factors that are turning negative. On the favorable side, you’re seeing some price inflation and some difficulty because of environmental regulations and inspections happening in China. And that means that there is less available bauxite inside of China. And to a certain extent, they are using some of this Guinean bauxite and other sources to offset that. On the global side as you see freight rates creeping up. That actually makes -- that makes some of the further distanced bauxites a bit more disadvantaged when compared to material source from Australia as an example. So, it’s a complex market. I would say that we’re still committed to growing that market if we find the customers on the other side that will make the sale of those with our reserves in the ground make it profitable for Alcoa to take them out of the ground and sell them.

Okay, make sense. Thanks a lot.

Thanks, Timna.

Your next question comes from Chris Terry with Deutsche Bank. Please go ahead.

Hi, Roy and Bill, a couple of questions from me. The first one just thinking about the capital management, maybe coming at it from a different angle. The $2.7 billion of unfunded pension and OPEB, where do you eventually want to get that number to, are you happy with where that’s at today? And I guess with the slide 15 where you’ve got the $700 million of additional pension funding in the FY2018 outlook, with the $500 million bond and I think you said $300 million at the start of the year, have you decreased that from what was implied at $800 million down to $700 million or did that change as a result of the bond that was issued?

Yes, good questions, Chris. We’re sitting at currently -- as we said, $2.7 billion of pension and OPEB. To be clear, we would like to be largely out of the pension business in the next decade. And so, that’s our goal. And out of that $2.7 billion I believe roughly $1.6 billion off the top of my head is the pension and the OPEB is around $1.1 billion. So, with that as a long-term goal to be out of the pension business and when I say out of the pension business that means fully -- either fully annuitized or immunized versus interest rate changes. With that as the goal, we said this year that we would be contributing $300 million towards either pension or delever. We went out and we did the $500 million debt offering and we committed that to the pension. And that leaves $300 million for either further pension reductions or some form of deleveraging. So at this point, we've committed to around $200 million of further pension reduction and that would imply about $100 million of deleveraging, which most likely would occur through the Brazilian debt, we have about $137 million of Brazilian debt. So I hope that's clear. And just to reiterate it, $500 million of that we borrowed, $300 million of either pension or delevering. At this point we're saying $200 million towards the pension and $100 million towards delevering. As far as where we want to get long-term with the pension. As I said we'd like to get out of the business, but overall I think we could see a further $400 million to $700 million over the next few years of either delevering or contribution to -- excess contributions to the pensions. So when we look at our capital structure, we think we'll be in an optimal capital structure, if after we've done all of our actions this year, and then we do an additional $400 million to $700 of deleveraging in the future.

Okay that's clear. And then so my other question just related to the energy business. Last year, you had a big step up from 2Q into 3Q with some seasonality. Is there anything expected with that. Was that a one-off last year or should we expect a similar pattern in 2018?

Recall, last year we had a big step up from second quarter to third quarter and then a tremendous fall off third quarter to fourth quarter. So if you recall in the third quarter to fourth quarter I think we saw something like a $55 million to $60 million decline on the energy side. At this point and it's very, very hard to forecast energy prices in Brazil. But at this point, the energy situation in Brazil from a pricing standpoint looks pretty constructive. So we are saying that we believe that ratably during the course of the year you're not going to see a significant jump up in the third quarter or a fall-off in the fourth quarter. So pretty consistently good in the third and the fourth quarter.

Okay, thanks. And just the last one, Beck and Core [ph] any update there?

Yes, so we've actually come back to the negotiating table. However, as we've said before on this call and at the Annual Shareholders Meeting, we're focused on a long-term solution for that plant, a long-term competitiveness versus competitors around the world. And also it's a plant where we'd like to be investing long into the future. So we look at this as -- we look at these discussions as an opportunity to affect real change to ensure that we don't have these types of arguments in the future. And that we can really set what could be a world-class facility up for long term success. So we're continuing to discuss, we have no update as far as when those discussions will conclude.

Okay.

The next question comes from Piyush Sood with Morgan Stanley. Please go ahead.

Good evening and thanks for taking the questions.

Hi, Piyush.

You guys talked about the operating issues in alumina, we can kind of see it in the bridge. Could you also talk about what's the $30 million sequential impact in 2Q related to? And does that also include something from operations or is that something completely different?

Yes that's something completely different. There is two major components to that. If you look at the left hand side of the bridge, we capture what changes occur from the alumina price index. And then in the price mix category we capture any deviation from alumina price index contracts. So there is really two components to that. The first is timing of shipments and when they occur during the course of the quarter. And what API is achieved in those timing of shipments that's roughly half of the impact. And then the second half of that impact is there are still some contracts that have slightly different pricing mechanisms that may be API on a lag or API, variations from API and that's the second piece of that $30 million. So no operational impacts included in that number purely variations off of the alumina price index.

That's helpful. And on -- similar question on bauxite side, price mix of minus 6 other of minus 6, it's kind of a relatively high number for the amount of EBITDA bauxite generate. So, if you could talk about that as well?

Yes, so I can address the price mix in bauxite. The bauxite prices, even though realized prices are showing a slight increase on a sequential quarter basis. Underlying prices once you strip out the impact of freight actually went down in the quarter. So from a margin perspective, you see a negative flowing through margin. I would have to look at what the other impact is in bauxite and I'm sure you can follow-up with Jim later tonight.

I would remind you also in bauxite of one additional factor. Remember that at the end of last quarter was when the RUSAL sanctions were first announced. And so some of those shipments that were intended to RUSAL were redirected at that point. So that also has us an impact that occurred during this quarter.

Okay, understood. And you did mention that if I heard that correctly, the ability to return cash this year is about $437 million. What do you have now, what's the number for next year?

Piyush, it will be based on -- there is a component of it that's based on how much we return this year. So there is a flexibility in next year’s if we don't return cash this year. I just -- I don't know the number off the top my head, Piyush.

Okay, thank you and I'll get back in the queue. All the best guys.

Good. Thanks, Piyush.

Our next question is from Lucas Pipes of B. Riley FBR. Please go ahead.

Hey, good afternoon, everybody.

Hey, Lucas.

I wanted to follow-up on one of Chris Terry's question in regards to the pension. When I look at slide 28, it shows about the $300 million of the minimum pension funding, $700 million of additional pension funding and then the $125 million of OPEB payments. If I follow the response to Chris's question correctly, it would suggest that there is maybe just about $200 million left under that additional pension funding, is that right?

There is around $100 million left on the additional pension funding, discretionary pension funding this year. So if you follow through the logic, I think we say $700 million of discretionary pension funding, $500 million of which we've already done through the debt offering that we did. We did $100 million to facilitate the annuitization of a large portion of retirees in Canada. And if we're going to do $700 million this year that would leave another $100 million to be done in the third quarter.

Got it. And all the other pieces of that table those payments have been made?

There are some of those payments that will -- so which page, page 28?

Page 28.

The minimum pension funding that will be made ratably during the course of the year, right. So that has not all been made in the first half. There are still some of that gets made in the second half

Got it, got it. Very helpful, thank you for that. And then, you see both alumina and aluminum markets in deficit and you have some capacity that is curtailed in both of those sectors, what would it take for you to bring on -- to restart additional capacity?

So, that's a calculation that we do really on a pretty frequent basis to be quite honest. And so we look at the curtail capacity we have around the world some of it’s in the United States, some of it’s elsewhere. The fact is that we look at that on a pretty robust basis depending on market conditions of course and what we think as far as short-term as well as medium and long-term pricing. But we also look at local conditions, the ability to actually sell that product that smelter or that refinery might happen to make. And we look for good sources of power, how that impacts the raw material markets. It’s a pretty complex and a complex calculation. And so, each of those has a very different set of drivers that would make it actually profitable. So, look at São Luís down in Brazil as an example of that. It’s a place where it’s a competitive plant. There is real demand inside of Brazil that today is not being addressed, but we would need a good medium-term power contract that could help make that plant competitive on the global scale. So, we keep an eye on supply and demand locally and then globally. And we also have a very close eye on what the financial characteristics are. So, there is not -- it’s not as simple as a particular breakeven price for each of the plants, but of course pricing both on aluminum as an output and alumina as an input are both important.

And if I could circle back to your original question while Roy was addressing your question. Out of the $300 million of required pension funding, about a third of that has already occurred during the course of the first half.

Got it. Very helpful gentlemen, I appreciate it and best of luck.

Thank you.

Thank you.

Our last question comes from Justin Bergner with Gabelli & Company. Please go ahead.

Good afternoon, Roy. Good afternoon, Bill.

Hey, Justin.

The energy headwind of $22 million this quarter, could you clarify that a bit? And then I guess the flat rolled EBITDA was breakeven after doing $11 million in the first quarter, any sort of clarity there would be helpful too?

Yes, so the energy impact, biggest piece of that is Spain, Spanish energy cost. We’ve seen Spanish energy costs increase in the second quarter. The other components that are smaller, they are in places like Norway and the Pacific Northwest. So, we’re seeing increases in those areas. What was the second question?

Flat-rolled.

Flat rolled, flat rolled results. Flat rolled was negatively impacted by the fact that we didn’t have the third line up and running. Flat rolled had a number of negative impacts in the second quarter also higher transportation cost, specifically outbound transportation cost. We’re projecting that flat rolled improves seasonally in the third quarter and the fourth quarter. So, we are projecting that that rebounds fairly nicely in the third quarter and the fourth quarter.

Okay, great. And then a question on the alumina market, it seems like the deficit is about the same -- the forecasted deficit is the same as it was coming out of the first quarter, I just wanted to make sure that was correct because it seem like qualitatively suggest that things might be a little bit tighter there? And I guess the second part of the question is if Alunorte is going to stay down longer, what do you think is causing the pricing in the alumina market to be a little bit softer than you anticipated a quarter ago or that the market was pricing in a quarter ago?

Yes, let me address the second one real quickly and you can go back to that. I mean if you recall a quarter ago, we had the RUSAL sanctions hanging over the market and we saw alumina prices spike up to very high levels. And I think as Roy addressed in his comment, I believe some of that concern around the RUSAL sanctions has come out of the marketplace. And probably the biggest driver currently in the alumina market is the fact that Alunorte is down still. So, that’s why you’ve seen alumina prices go from their highs right after the RUSAL sanctions that are announced down to the levels that we’re at today.

But again, you can also watch how that price is setting on a daily basis and see what transactions are feeding into that. Just today we had a pretty significant increase and it reflects that there is simply not enough alumina in the market to fulfill all of the demand. When you sort of step back and compare first quarter, our first quarter estimate versus this quarter’s estimate, there is gives and takes. So, as you pointed to Alunorte is we built in a longer period, where that’s going to be down. So, that is less supply coming to the market. But we've also seen China ramp up some of their alumina capacity. Now China tends to be the marginal player and they ramp it up when there is an advantage of them to -- when they have a cost advantage or a price advantage to sale either in market or out of the market. What's been different in this downturn, what's been different in this latest pricing environment is the fact that the differential between outside of China prices, and inside of China prices has actually driven some of that material to be exported. Now that tend to be a pretty costly process, but it tends to keep those two markets more or less in check. So you’ve seen a little bit more production coming from China, a little bit less production coming from outside of China. And that's tended to keep the market in relative balance compared to last quarter to this quarter. Again, it's in a deficit situation, which is really what's driving the fact that on a relative basis alumina is priced relatively expensively compared with aluminum.

Great, that was very helpful. Thank you.

And our next question comes from Alex Hacking with Citi. Please go ahead.

Hi guys. Thanks Roy and Bill. My first question, in the guidance you've talked about higher energy costs, could you quantify that please? Thanks.

Yes, versus guidance. So in the reduction in the guidance there is about $50 million of higher energy costs globally. Again that is somewhat higher oil and gas prices. And then electricity prices in Spain, Norway and the Pacific Northwest. So in the guidance change, there is $50 million of higher energy costs.

Okay, perfect. And then my second question is more of a market question. Your view on the cost curve, I recognize it's a moving target. But at today's prices, what percentage of Chinese aluminum production do you think is profitable. Thanks.

Aluminum production, Alex?

Yes, aluminum. Yes.

Yes. So we keep very close track of that. And it tends to move on a month-by-month basis. As we look at the way the pricing is done inside of China versus where it sits on the cost curve. Our estimate is a little bit less than 40% unprofitable [ph] at this point.

Okay, perfect. I appreciate the color. Thank you very much.

And our last question today will come from John Tumazos with John Tumazos Very Independent Research. Please go ahead.

Thank you very much.

Hi, John.

Good evening, thank you. The Chinese as you know, shut about a quarter of their alumina output by November-December versus June output peaks last year. How do you think they're going to evolve with the increased alumina output to export? Are they going to shut all those down again in November?

So let me take my best shot at that. Obviously it's a complex environment. So I would say that you've seen both Chinese acting on the discrepancy between outside of China, inside of China prices and that's actually incentivize production. However at the same time, you've also seen that a movement inside of China because prices are not particularly attractive to be careful about what production is done. And so you've got sort of the odd situation where you've seen some increase in production in alumina, but then you've also had some of the producers actually talking about maintenance outages and actually curtailing some of the facilities. So it's hard to define exactly what will come from that market. What I would say though is that Chinese tend to act in a very economically rational manner when it comes to the alumina market. So in that variation between the two markets gets to a point where it justifies shipping the alumina back to a port, turning it from big bags into a bulk shipment giving it overseas to the customer, which all has costs involved. I think we find that the Chinese produce and then they ship it. But that tend to then bring those two markets that sort of that umbilical core that bring the two markets back into relatively balanced positions. And so they act economically. They tend to curtail when prices come down, they tend to restart capacity when prices come up. And then you have the added dimension of what will happen with the winter curtailment, et cetera. There was not a big impact of winter curtailments last year. However that is a program still to be defined for the end of this year and the start of next.

And just to add on a small point to that Roy, I thought you made it well, but we have really started to watch the arbitrage for alumina between China and the rest of the world. In the April timeframe the time that I referred to when we saw the RUSAL sanctions come online and alumina prices went up sharply. We saw that arbitrage window open fairly large. And interesting enough, we saw exports in May. And that arbitrage window subsequently closed in June, the arbitrage actually went negative. In early July, there is still a small arbitrage window. We don't have yet the June export numbers for China. But to reiterate what Roy said, the Chinese industry is pretty economic when that arbitrage window open, we almost immediately saw exports flow out. And when it closed we saw those exports slow down.

Thank you.

Thank you for the question, John.

This concludes our question-and-answer session. I would like to turn the conference back over to Roy Harvey for any closing remarks.

Thank you, operator. I'd like to thank everybody for their time today. To sum up, as we enter into the second half 2018, we will continue to execute on our strategic priorities and we are very focused on building a stronger Alcoa. It is during times of high uncertainty and volatility where our actions and decisions can have the most and longest term impact. We have lot to do and we are clearly focused on it. We remain committed to driving value for our stockholders. I'd like thank you for your time today. And I'll turn it back over to the operator now.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.