April 8 (Bloomberg) -- Alcoa Inc., the world's third- largest aluminum company, fell in New York trading after reporting first-quarter profit more than halved on surging energy costs, lower metals prices and a slumping U.S. dollar.

Alcoa slid as much as 2.5 percent after saying yesterday net income dropped to $303 million, or 37 cents a share, from $662 million, or 75 cents, a year earlier. Profit at New York- based Alcoa was 44 cents a share excluding some items, compared with the 50 cents forecast in a Bloomberg survey of 14 analysts.

Chief Executive Officer Alain Belda is selling less- profitable units after the company fell behind United Co. Rusal and Rio Tinto Group in aluminum production last year. Alcoa is seeking to sign long-term electricity contracts and increase use of hydropower to cut costs that helped push profit at its primary metals business down 39 percent to $169 million.

``Energy and other input costs have been rising faster than aluminum prices and they are getting a margin squeeze,'' said Leo Larkin, a metals and mining analyst at Standard & Poor's in New York. ``The worst may be over in terms of their margins'' since some results were better than in the fourth quarter, he said.

Alcoa fell as much as 94 cents to $36.50 and was trading at $37.40 at 12:04 p.m. in New York. Before today, the stock had risen 2.4 percent this year.

Lower Ranking

First-quarter sales shrank 6.7 percent to $7.38 billion, while operating income fell at four of the company's five units. Profit in the primary-metals business dropped 39 percent to $307 million.

Earnings at S&P 500 companies probably declined an average 11 percent from the same period a year earlier, according to analyst estimates compiled by Bloomberg.

Alcoa slipped from its position as the world's largest aluminum producer last year after a merger that led to the creation of Russia's Rusal. Rio Tinto's $38.1 billion takeover of Alcan Inc. pushed Alcoa to third.

Alcoa and Aluminum Corp. of China, also known as Chinalco, agreed to buy a 12 percent stake in Rio Tinto in February, and Alcoa now is seeking more joint ventures in China, the Middle East and North America to increase capacity. The company is talking with Chinalco about ``various options for the future,'' Chief Operating Officer Klaus Kleinfeld said yesterday.

Price Rebound

Alcoa sold aluminum for an average $2,801 a metric ton in the quarter, down 3.5 percent from a year earlier. Prices have since rebounded after power cuts to smelters in South Africa and China.

``Aluminum prices should stay where they are in the next quarter and then tail off towards the end of the year as more metal comes on to the market,'' Marco Georgiou, an analyst at London-based metals consulting company CRU, said today in a telephone interview.

The metal for delivery in three months has risen 24 percent on the London Metals Exchange this year and was down $11 at $2,987 a ton at 3:58 p.m., above Alcoa's average first- quarter sales price.

``We expect to see continued improvement in operating results in Q2, largely due to higher aluminum prices during the quarter,'' David Gagliano, an analyst at Credit Suisse in New York, said in a note today to investors. ``Alcoa's restructuring efforts allowed them to maintain margins in a weak U.S. demand environment.''

U.S. Aluminum Demand

U.S. aluminum demand will probably fall 5 percent this year, to 6.4 million tons, the company said. The only Alcoa segment to post higher earnings was the engineered products and solutions unit, where income rose 31 percent to $138 million. Profit at the alumina business slid 35 percent to $169 million.

``The alumina segment performed significantly worse than expected,'' David A. Lipschitz, an analyst at Merrill Lynch & Co. in New York who has a ``buy'' rating on the shares, wrote yesterday in a note. Increased energy costs ``negatively impacted results.'' Lipschitz cut his 2008 estimated earnings per share to $3 from $3.25 because of the higher alumina costs.

Alcoa's average aluminum sales price during the quarter was down 3.5 percent from a year earlier. Prices have since rebounded after power cuts to smelters in South Africa and China.

Aluminum is sold mostly in dollars, meaning a weakening U.S. currency increases costs the company must pay in Australian dollars and Brazilian reais. The declining U.S. currency reduced earnings by 8 cents compared with the fourth quarter, Alcoa said. The company didn't provide a figure for a year earlier.

Mining, Metals Investments

Alcoa expects to add as much as 50 cents to earnings a share in 2008 through mining and metals investments, including the expansion of the Fjardaal smelter in Iceland, which will produce 300,000 tons of aluminum this year. The company is completing a 90,000-ton addition at the Pinjarra alumina refinery in Australia.

World demand for aluminum will probably rise about 9.6 percent to 41.7 million tons this year, led by a 24 percent increase in demand from China and an 8.3 percent gain in India, according to the company. Chinese demand this year will be about 14.9 million tons.

The market this year will be ``essentially balanced'' because of supply disruptions in China and South Africa, Chief Financial Officer Charles McLane said yesterday on a conference call with analysts. Inventories of aluminum as measured by global days of consumption are ``low by historic levels,'' he said.

``Improving aluminum market fundamentals due to supply constraints bode well for aluminum prices,'' Oscar Cabrera, an analyst at Goldman, Sachs & Co. wrote today in a note to investors.

To contact the reporter on this story: Dale Crofts in Chicago at dcrofts@bloomberg.net; Mark Herlihy in London at mherlihy1@bloomberg.net.

Last Updated: April 8, 2008 12:09 EDT