Alcoa to Cut Smelting Capacity by 12% After Aluminum Decline

Alcoa Inc., the biggest U.S. aluminum producer, will close 12 percent of its global smelting capacity after the price of the lightweight metal slumped amid a global surplus.

The company will permanently close its smelter at Alcoa, Tennessee, and two of six idled potlines at its Rockdale, Texas, plant, eliminating 291,000 metric tons of annual capacity, the New York-based company said yesterday in a statement. An additional 240,000 tons of curtailments will be announced “in the near future.”

Aluminum, which is used in beverage cans, auto parts and aircraft, tumbled 18 percent in 2011 as global economic growth decelerated, making some smelters unprofitable. Analysts have cut their earnings estimates in the past month. The average of 18 estimates for Alcoa’s fourth-quarter is for a 1-cent loss, compared with a projected 7-cent profit 30 days ago.

Alcoa’s move “should help pricing, especially if other producers follow,” Brian Yu, a San Francisco-based analyst with Citigroup Inc. who has a “neutral” rating on Alcoa, said in a note yesterday. “The aluminum market faces structural challenges because of excess capacity and high observable inventories.”

Alcoa fell 2.1 percent to $9.16 in New York. Aluminum for delivery in three months on the London Metal Exchange, the benchmark price on the world’s largest metals bourse, rose 1.6 percent to $2,069 a ton.

‘Necessary Steps’

The cuts are expected to be completed in the first half of this year. Alcoa, which reports its earnings on Jan. 9, will take a charge of $155 million to $165 million, or 15 to 16 cents a share, for the fourth quarter.

Alcoa said its current global smelting capacity is 4.5 million tons a year. The cutbacks announced yesterday are equal to about 1 percent of global smelting capacity, which stands at 49 million tons, according to the U.S. Geological Survey.

“These are difficult but necessary steps,” Alcoa Chairman and Chief Executive Officer Klaus Kleinfeld said in the statement.

The curtailments are “meaningful to them, but it’s not that much to world supply,” Charles Bradford, president of Bradford Research in New York, said in a telephone interview yesterday. “If you have less supply, that should help the metal price but I’m not so sure it’s going to work this time.”

Deripaska’s Warning

Alcoa cut production by about 750,000 tons, or about 18 percent of capacity, in 2009. Russia’s United Co. Rusal and Norway’s Norsk Hydro ASA also reduced output that year after aluminum prices tumbled 36 percent in 2008.

The possibility of similar output cuts reemerged in the final months of 2011 as the aluminum price declined again. Oleg Deripaska, CEO of Rusal, the world’s largest producer, said last month that falling prices may force 3 million tons of capacity to be closed or mothballed.

Rio Tinto Group, the world’s third-largest producer, said in November it would close its Lynemouth smelter in Northumberland, England, because of increasing energy costs. London-based Rio said in October it would sell 13 aluminum assets to improve its financial performance.

Norsk Hydro, Europe’s third-biggest producer, said in October that it had no plans to restart the 26 percent of its capacity that was shuttered in 2009.

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