It used to be that America's aluminum giants were among its strongest performers. While old-line steel titans fumbled and fiddled under pressure from foreign rivals, Alcoa, Reynolds Metals, and Canada's Alcan stayed world-beaters by pouring money into research, investing in the latest technology, and creating vast new markets for their metal. So why are these dynamos suddenly slumping big time?
Call it an acute case of post-cold-war fallout. North American aluminum companies are reeling from a surge of cheap imports from Russia, where huge smelters, with virtually no aviation or defense industries to sell to, are sending 1 million metric tons a year of cheap aluminum to the West. With warehouses brimming with shiny ingot, prices have tumbled to 49 a pound, an all-time low if inflation is factored in. As a result, Aluminum Co. of America announced on Oct. 8 that its third-quarter earnings fell 36.4%, to $28.8 million, on revenues that were off 6.3%, to $2.2 billion.
AVALANCHE. Alcoa did well, compared with its rivals. On Oct. 12, Alcan Aluminum Ltd. posted a $13 million third-quarter loss on revenues that fell 7.4%, to $1.8 billion. Analysts expect Reynolds Metals Co., which lost $55 million on sales of $2.6 billion in the first half, to remain in the red. "There's too damn much material," says Alcoa Chairman Paul H. O'Neill.
The bad news is far from over. Since the Russian avalanche began in late 1990, U.S. aluminum makers have cut production by 796,000 metric tons, or 20% of capacity, and laid off 1,300 employees. But prices continue to fall. Meanwhile, the European Community, after cutting production by 320,000 metric tons, is trying to limit shipments from Russia to Europe--detouring more of the metal to North America.
With aluminum makers facing a painful war of attrition, they're now hoping that multilateral trade talks, scheduled for Oct. 21-22 in Moscow, will push the Russians to match Western cutbacks. "If we cut more, we put highly paid American workers with good benefits on the street, so that [the Russians] can run their old plants, with workers who make 15 or 20 bucks a month," says Bond Evans, CEO of producer Alumax Inc.
For now, however, North American aluminum companies have little choice but to hunker down. Alcoa has slashed its R&D budget and laid off 400 workers at headquarters. Reynolds is busy selling off nonstrategic businesses, from ice-cream-bar maker Eskimo Pie Corp. to an Australian gold mine. And last month, Alcan's board, eager to restructure the company, retired CEO David Morton a year early, replacing him with his No.2, Jacques Bougie. Bougie's mission, he says, is to cut costs enough to make the company "one of the lowest-cost aluminum producers in the world."
Meanwhile, capacity outstrips demand in the companies' core markets. Take aluminum cans. Beer consumption is falling in the U.S., and many soda drinkers are ditching aluminum cans for bigger plastic bottles. What's more, canmakers are working with ever-thinner grades of aluminum, which means slimmer shipments. The upshot, says Thomas Van Leeuwen of CS First Boston Group Inc.: "There's going to be a dogfight for volume." In an attempt to secure its market for can-sheet, Reynolds has announced plans to buy Miller Brewing Co.'s can plants.
BULLISH TRADERS. To be sure, aluminum makers do have a few growth markets. Detroit is one. Aluminum's share of the auto market continues to grow: The average car contains 191 pounds of the metal, up 47% in a decade. A good year in Detroit is buoying North American shipments, which are up 4.7% this year. And President Clinton's new pact with auto makers to produce fuel-efficient cars should boost demand further.
Such growth prospects are one reason Wall Street has stayed relatively bullish on aluminum companies, despite the havoc from Russia. Alcoa stock, for instance, barely hiccuped with its disappointing third-quarter earnings, staying in the mid-60s, 10 points above its 12-month low. But investors' patience will certainly be tested if the companies fail to reach an accord with Russia.
To try to clinch a deal, aluminum companies are offering technical and environmental assistance to the Russians, and even an aluminum-foil joint venture in Siberia. North American producers are clearly eager for relief. The alternative, they fear, might be a long, painful slide like the one that hit Big Steel.