KAISER ALUMINUM CORP 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk The following quantitative and qualitative disclosures about market risk should be read in conjunction with Note 4 and Note 7 of Notes to Interim Consolidated Financial Statements included in this Report. Our operating results are sensitive to changes in the prices of primary aluminum, certain alloying metals, natural gas, electricity and foreign currency, and also depend to a significant degree upon the volume and mix of products sold to customers. We have historically utilized hedging transactions to lock in a specified price 31 or range of prices for certain products which we sell or consume in our production process, and to mitigate our exposure to changes in energy prices. Aluminum During the six months ended June 30, 2022 and June 30, 2021, settlements of derivative contracts covering 137.0 million pounds and 57.5 million pounds, respectively, hedged shipments sold on pricing terms that created aluminum price risk for us. At June 30, 2022, we had derivative contracts with respect to approximately 87.5 million pounds and 16.2 million pounds to hedge sales to be made in the remainder of 2022 and 2023, respectively, on pricing terms that create aluminum price risk for us. Based on the aluminum derivative positions held by us to hedge firm-price customer sales agreements, we estimate that a $0.10 per pound decrease in the London Metal Exchange (“LME”) market price of aluminum as of June 30, 2022 and December 31, 2021, with all other variables held constant, would have resulted in an unrealized mark-to-market loss of $10.4 million and $8.0 million, respectively, with corresponding changes to the net fair value of our aluminum derivative positions. Additionally, we estimate that a $0.05 per pound decrease in the Midwest premium for aluminum as of June 30, 2022 and December 31, 2021, with all other variables held constant, would have resulted in an unrealized mark-to-market loss of $3.1 million and $4.0 million, respectively, with corresponding changes to the net fair value of our aluminum derivative positions. Alloying Metals We are exposed to the risk of fluctuating prices of certain alloying metals, especially copper, zinc and magnesium, to the extent that changes in their prices do not highly correlate with price changes for aluminum. Copper, zinc, magnesium and certain other metals are used in our remelt operations to cast rolling ingot and extrusion billet with the proper chemistry for our products. From time‑to‑time, we enter into forward contract swaps and/or physical delivery commitments with third parties to mitigate our risk from fluctuations in the prices of these alloys. As of June 30, 2022, we had forward swap contracts with settlement dates designed to align with the timing of scheduled purchases of zinc and copper (“Alloying Metals”) by our manufacturing facilities. We estimate that a $0.10 per pound decrease in the market price of Alloying Metals as of June 30, 2022 and December 31, 2021, with all other variables held constant, would have resulted in an unrealized mark‑to‑market loss of $0.3 million and $0.6 million, respectively, with corresponding changes to the net fair value of our Alloying Metals derivative positions. Energy We are exposed to the risk of fluctuating prices for natural gas and electricity. We, from time-to-time, in the ordinary course of business, enter into hedging transactions and/or physical delivery commitments with firm prices with third parties to mitigate our risk from fluctuations in natural gas and electricity prices. We estimate that a $1.00 per mmbtu decrease in natural gas prices would have resulted in an unrealized mark-to-market loss of $4.3 million and $5.2 million as of June 30, 2022 and December 31, 2021, respectively, with corresponding changes to the net fair value of our natural gas derivative positions. We estimate that a $5.00 per Mwh decrease in electricity prices as of June 30, 2022 and December 31, 2021 would have resulted in an unrealized mark‑to‑market loss of $0.6 million and $1.1 million, respectively, with corresponding changes to the net fair value of our electricity derivative positions. Foreign Currency As of June 30, 2022, we hedged certain lease transactions and equipment purchases denominated in euros using forward swap contracts with settlement dates through February 2024. We estimate that a 10% decrease in the June 30, 2022 exchange rate of euros to U.S. dollars would have resulted in a $0.1 million unrealized mark-to-market loss with corresponding changes to the net fair value of our foreign currency derivative positions.