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Alcoa Net May Drop as Dollar Offsets Metal Price Gain

Alcoa CEO Klaus Kleinfeld
Alcoa Chief Executive Officer Klaus Kleinfeld. Photographer: Jin Lee/Bloomberg

Alcoa Inc., the largest U.S. aluminum producer, may post a 29 percent drop in third-quarter profit after a weaker dollar raised costs in Europe, Australia and Brazil, offsetting an increase in the price of the metal.

Alcoa will today report earnings excluding some items of 5 cents a share, according to the average estimate of 16 analysts surveyed by Bloomberg. The company posted a 7-cent profit a year earlier.

Alcoa, led by Chief Executive Officer Klaus Kleinfeld, sells metal for dollars and pays costs at foreign operations in local currencies. The company’s largest single source of revenue after the U.S. is Australia, whose local currency appreciated 14 percent against the U.S. dollar in the quarter. Alcoa is the worst performer in the Dow Jones Industrial Average this year, falling 23 percent in New York trading.

“It would be difficult for Alcoa to present a very bullish story on core commodity given what we know is happening globally,” Jorge Beristain, an analyst at Deutsche Bank AG in Greenwich, Connecticut, who rates the stock “hold,” said in a telephone interview. The weaker dollar will be a “headwind” to Alcoa’s earnings this quarter, he said.

Alcoa, traditionally the first company in the Dow Jones Industrial Average to announce quarterly earnings, will report after the market closes. The shares rose 13 cents, or 1.1 percent, to $12.50 at 7:44 a.m. before the open of regular New York Stock Exchange trading.

‘Double-Edged Sword’

Alcoa smelts aluminum and refines alumina, a raw material used to make the metal, in Australia, Europe and Brazil. The Australian dollar had the second-largest gain against the greenback among a basket of 16 major currencies tracked by Bloomberg. The euro was third, strengthening 11 percent. The Brazilian real climbed 7 percent.

Alcoa loses $75 million of annual net income for every 10 percent increase in the Australian dollar, Alcoa said in a July presentation. It also said it loses $40 million for a 10 percent increase in the euro and gains or loses $200 million for every $100-a-metric-ton advance or drop in the aluminum price.

Currencies are “a double-edged sword,” said Brian Yu, an analyst at Citigroup Inc. in San Francisco who has a “buy” recommendation on Alcoa shares. “It increases costs for Alcoa, but at the same time the weaker dollar tends to drive up aluminum prices.”

Global Surplus

Aluminum for delivery in three months on the London Metal Exchange rose 0.5 percent to $2,377 a ton at 12:51 p.m. in London. The metal averaged $2,110 in the third quarter compared with $1,836 a year earlier. Aluminum is 30 percent below its July 2008 peak of $3,380 a ton as inventories remain within 6.6 percent of their January record high.

Aluminum inventories piled up as global production exceeded consumption. Excess output will increase to 1.22 million tons this year, from 791,000 tons in 2009, RBC Capital Markets analysts led by H. Fraser Phillips said in a Sept. 21 note. Inventories monitored by the LME, the world’s largest metals bourse, fell 0.1 percent to 4.34 million tons today.

“There’s just too darn much of it,” said John Stephenson, who wrote “The Little Book of Commodity Investing” and helps manage C$1.65 billion ($1.63 billion) at First Asset Investment Management Inc. in Toronto.

“Until you start to see end-use demand pick up in a much more significant way and you start to see inventories reduced on the LME, it’s hard to see this moving in a major way,” he said.

Alcoa may see higher demand because some Chinese aluminum smelters have been ordered to cut production to meet energy usage requirements, said Charles Bradford, a partner at Affiliated Research Group LLC, a New York-based consulting firm.

Alcoa “cannot single-handedly change the commodity price,” Beristain said. “What really can get the needle moving for Alcoa would be a global change in aluminum, a global overnight change in demand outlook.”

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