Alcoa Profit May Double on Aluminum Demand

Alcoa Inc. (AA), the largest U.S. aluminum producer, may say second-quarter profit more than doubled as customers from General Motors Co. (GM) to Airbus SAS helped drive demand for the lightweight metal.

Profit excluding one-time items rose to 33 cents a share, from 13 cents a year earlier, according to the average estimate of 14 analysts surveyed by Bloomberg. The New York-based company, which is typically the first in the Dow Jones Industrial Average to report earnings, will report after the close of the market today.

Aluminum prices averaged 24 percent higher on the London Metal Exchange in the quarter as usage soared in China, the biggest consumer. Alcoa Chief Executive Officer Klaus Kleinfeld is forecasting global demand will increase by 12 percent in 2011 and double by the end of the decade as Asian countries build more office blocks and buy more aircraft, cars and trains.

“Anything transportation is strong,” Lloyd O’Carroll, an analyst at Davenport & Co. in Richmond, Virginia, who has a “neutral” recommendation on Alcoa, said in an interview. “That’s a major driver.”

Alcoa fell 34 cents, or 2.1 percent, to $16.04 at 9:39 a.m. New York time in New York Stock Exchange composite trading. The shares advanced 47 percent in the past 12 months, the third-best performer in the Dow Jones Industrial Average.

Sales advanced 22 percent to $6.31 billion in the second quarter, according to the average of seven analysts’ estimates compiled by Bloomberg. Aluminum for immediate delivery on the LME averaged $2,600 a metric ton in the quarter, up from $2,092 a year earlier.

Demand Doubling

Mike Belwood, an Alcoa spokesman, declined to comment before the earnings were released.

The company’s aerospace revenue was $2.9 billion in 2010, compared with total sales of $21 billion. Worldwide shipments to the aerospace industry will increase 15 percent in 2011, according to O’Carroll. Auto sales will gain 9 percent while cars’ aluminum content will grow by 1.5 percent a year as manufacturers replace steel with the lighter metal, he said.

European Aeronautic, Defence and Space Co.’s Airbus, and Boeing Co. are increasing production of narrow-body aircraft to reduce the backlog of customer orders. Alcoa said June 24 it agreed to a multiyear aluminum supply contract with Airbus valued at about $1 billion. AMR Corp.’s American Airlines is discussing an order of as many as 280 new narrow-body jets in a deal that may set an industry record, in talks with Airbus and Boeing, two people with knowledge of the matter said last month.

Alumina Contracts

GM has expanded factories this year and has announced plans to invest $2 billion over the next four years as the company adds new models. The Detroit-based company’s sales are up 17 percent through June this year.

Alcoa produced 889,000 tons of aluminum in the first quarter. The company’s second-quarter shipments of the metal should be higher, Michael F. Gambardella, an analyst at JPMorgan Chase & Co., said in a June 22 note.

The aluminum company benefitted in the quarter from more advantageous alumina sales contracts, according to Charles Bradford, president of Bradford Research.

Alcoa company makes alumina, a raw material used in aluminum smelting, and sells the output it doesn’t need. It plans to sell all of its alumina based on spot prices by 2015, ending the use of traditional supply contracts that peg the raw material at a fixed percentage of the LME metal price.

In the first quarter, 20 percent of alumina customers were pegged to spot or indexed alumina prices, Kleinfeld said in April.

Higher Costs

Still, aluminum production costs increased in the second quarter. The weakness of the dollar against currencies where Alcoa has foreign operations lifted costs by as much as 2 cents per pound of aluminum compared with the preceding three months, Brian Yu, an analyst at Citigroup Inc. in San Francisco, said in a July 6 note. Smelting costs rose to $1.07 a pound from $1.04 on higher prices for coke and pitch, raw materials used in aluminum production, and for electricity, Yu said.

“Costs are kind of playing catch up,” Jorge Beristain, a Greenwich, Connecticut-based analyst at Deutsche Bank AG, said in an interview. “I don’t think it’s derailing the thesis for Alcoa. I think they should be able to push up higher volumes in coming quarters.”

To contact the reporter responsible for this story: Sonja Elmquist in New York at Selmquist1@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net.

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