Alcoa’s Earnings Recovery Slows on Aluminum Price ‘Headwind’

Alcoa Inc. Chief Executive Officer Klaus Kleinfeld
Alcoa Inc. Chief Executive Officer Klaus Kleinfeld. Photographer: Ramin Talie/Bloomberg

Alcoa Inc., the largest U.S. aluminum producer, may report a slowdown in its earnings recovery after the lightweight metal used in beverage cans and aircraft erased all this year’s price gains.

Third-quarter net income will be 22 cents a share, compared with 9 cents a year earlier, according the average of 15 analysts’ estimates compiled by Bloomberg. That’s 21 percent less than analysts estimated a month ago.

“Aluminum was just starting to have its day in the sun in the first and second quarters,” Jorge Beristain, a Greenwich, Connecticut-based mining analyst at Deutsche Bank AG who has a “hold” rating on the shares, said in an interview. “Now the stool has been pulled out from the aluminum price. That creates a very tough headwind.”

The price drop is undermining efforts by Chief Executive Officer Klaus Kleinfeld to boost earnings at Alcoa. The New York-based company cut thousands of jobs and closed smelters since the plunge in commodities during the financial crisis in 2008 led to three successive quarterly losses.

Alcoa, the first company in the Dow Jones Industrial Average to issue earnings, will report after regular trading on North American markets closes today. Alcoa rose 2.1 percent to $10.30 at 11:04 a.m. in New York. The shares have dropped 33 percent in 2011, the worst performer on the Dow Jones after Bank of America Corp. and Hewlett-Packard Co.

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

Growth Doubts

Citigroup Inc. cut its estimate for Alcoa’s earnings to 19 cents a share from 23 cents in a note dated yesterday, citing lower aluminum prices and higher costs for raw materials such as caustic soda.

Alcoa’s smelters would likely post a loss in the fourth quarter if spot aluminum prices averaged 99 cents a pound ($2,182.55 a metric ton) for the full quarter, Brian Yu and Jonathan Sullivan, analysts at Citigroup, wrote in the note.

Aluminum for immediate delivery on the London Metal Exchange fell 15 percent in the third quarter. It fell 1.7 percent to $2,185 at 11:01 a.m. New York time, down 11 percent for this year. The metal traded at $2,772 a metric ton on April 28, its highest since Aug. 21, 2008.

The European debt crisis and doubts about global economic growth have reduced aluminum demand growth and suppressed prices, Lloyd O’Carroll, an analyst at Davenport & Co. in Richmond, Virginia, said in a Sept. 21 note.

Commodities Plunge

O’Carroll, who has a “buy” recommendation on Alcoa, cut his 2011 growth prediction for U.S. aluminum shipments to 9.5 percent, or 20.7 billion pounds, from 10.5 percent previously.

Alcoa’s earnings were 66 cents in the second quarter of 2008, before the collapse of Lehman Brothers Holdings Inc. and the financial crisis sent commodity prices tumbling. They haven’t exceeded 32 cents since. The company posted three consecutive quarters of losses through June 30, 2009. It has cut 20,080 jobs since June, 2008, according to Bloomberg data. In 2010, it permanently shut 295,000 tons of capacity at smelters in Maryland, North Carolina and Indiana.

Earnings of 23 cents would compare with 31 cents in the three months through June. That would be the first quarter-on-quarter drop in Alcoa’s earnings in a year. Third-quarter sales gained 18 percent to $6.24 billion, according to the average of nine analysts’ estimates compiled by Bloomberg.

Rusal Drops

“The decline in aluminum prices should be the largest negative for earnings sequentially,” O’Carroll said.

Rival aluminum producers are also feeling the pressure. Russia’s United Co. Rusal, the world’s biggest, said Oct. 5 it will reduce production at its higher-cost smelters. Rusal has fallen 43 percent this year. Norway’s Norsk Hydro ASA, Europe’s third-largest producer, said in July it would cut jobs and capacity this year because of lower construction demand.

Alcoa, which has operations in 31 countries, produced 3.59 million tons of aluminum and sold it at an average price of $2,356 a ton in 2010, according to filings.

The company is a fully integrated aluminum producer. It mines bauxite, an ore that contains aluminum, and refines it into alumina, the raw material used by aluminum smelters. As well as selling aluminum to industrial users, Alcoa also makes products such as can sheet and components for cars and aircraft.

Earnings will rise should commodity prices recover. Alcoa is “very levered” to the aluminum price, Beristain said. The metal will average $2,550 a ton next year, according to the mean of 15 analysts’ estimates compiled by Bloomberg. The metal averaged $2,173 last year and $2,488 so far this year.

Aluminum demand may continue rising, driven by China, the biggest consumer of the metal. Global use will increase 12 percent this year, Kleinfeld said in July. Aerospace demand will climb 7 percent this year, automotive will gain 4 percent to 8 percent, and commercial construction will rise 1 percent to 3 percent, Alcoa said in July.