Alcoa Facing ‘Hard Decisions’ on Aluminum Plants

Bob Wilt’s first job at Alcoa Inc. was in 1999 at a plant in the Tennessee town named after the company. In 2012, as head of the aluminum producer’s U.S. smelters, he oversaw the plant’s demolition.

As the new president of Alcoa’s global primary products business, the Gulf War veteran will now likely need to cut more production capacity after competition from China and a 15 percent slump in aluminum prices made the New York-based company the worst-performing stock in the Dow Jones Industrial Average this year.

Alcoa, which had its credit rating cut to junk by Moody’s Investors Service in May, will report after today’s close that its earnings were unchanged from a year ago, according to analysts’ estimates compiled by Bloomberg.

“You look back fondly on the experiences you had, but at the same time you’re trying to do what’s good for the broader organization,” Wilt said in a July 2 interview. “Those hard decisions are going to have to be made.”

Appointed head of the company’s largest unit by revenue, Wilt is reviewing 11 percent of aluminum capacity as Alcoa seeks to improve its competitiveness. Already this year there have been permanent shutdowns announced in Quebec and Italy, even as the largest U.S. aluminum producer sees record earnings from downstream segments selling components made out of the metal to customers such as Boeing Co. and General Motors Co.

Alcoa is “taking action on smelters and will get the job done,” said Lloyd O’Carroll, a Richmond, Virginia-based analyst at Davenport & Co. who recommends buying the shares. “The downstream stuff is rocking and is going to do a lot better.”

Price Drop

Alcoa will post second-quarter net income excluding one-time items of 6 cents a share, according to the average of 15 analysts’ estimates compiled by Bloomberg. The company declined to comment on its results ahead of their publication.

Shares of Alcoa rose 1 percent to $7.89 at 9:31 a.m. in New York. They declined 10 percent in 2013 through July 5, the worst performer on the Dow Jones Industrial Average. Aluminum for delivery in three months, the benchmark futures contract on the London Metal Exchange, dropped to $1,768 a metric ton in the same period. It traded at $1,758 on June 27, the lowest in almost three years.

The primary products business -- which makes aluminum slabs, ingots and billets -- will see earnings before interest, taxes, depreciation and amortization of $15 million in the second quarter, down 87 percent from a year earlier, Deutsche Bank AG estimates.

Cost Curve

“The division that is really bringing home the bacon is the downstream stuff,” said Jorge Beristain, a Greenwich, Connecticut-based analyst at Deutsche Bank who has a hold rating on the stock. “They can continue to shutter the stuff that is producing negative cash flow.”

Alcoa, the most valuable metals company in 2002, has been overtaken in size by diversified commodities producers such as BHP Billiton Ltd. and Glencore Xstrata Plc. Once the largest aluminum smelter by tonnage, it ranked behind Russia’s United Co. Rusal and Aluminum Corp. of China last year, according to data compiled by Bloomberg.

Chairman and Chief Executive Officer Klaus Kleinfeld’s stated aim is to move the company along what is known in the industry as the cost curve in the next two years, so that it’s within the cheapest 41 percent of global capacity.

To achieve that goal, Alcoa plans to add lower-cost production from a new 740,000-ton, low-cost smelter in a partnership with Saudi Arabian Mining Co.

Fuel Oil

Alcoa said in April it achieved $247 million in year-on-year productivity gains in the first quarter. It expects to cut $750 million in costs this year, compared with $1.3 billion in 2012, it said in a Jan. 8 presentation.

Wilt, 45, graduated from the U.S. Military Academy in West Point, New York, served in the Gulf War in Iraq with the Army’s 101st Airborne Division, and holds a Masters in Business Administration from Harvard Business School. He’s evaluating the future of older, higher-cost plants. With electricity accounting for about a third of production costs, the type of energy source is critical.

One of the ways Wilt plans to attain Alcoa’s cost-savings goal is by shutting smelters reliant on power generated from fuel oil, or converting them to other energy sources such as natural gas.

“Fuel oil is not a fuel source that’s competitive long-term for us in some regions,” he said.

‘Rapid Change’

The scale of the challenge in the aluminum market facing producers such as Alcoa can be seen in the size of stockpiles of the lightweight metal. Inventories total about 12 million tons, excluding China, Oleg Mukhamedshin, a director at Russian smelter United Co., said in an interview July 1. That’s equal to about 27 percent of 2012 global consumption, according to data compiled by Bloomberg.

While producers worldwide have announced capacity cuts of about 1.3 million tons in 2013, others are set to add 5.4 million tons of capacity this year, led by new plants in China, Morgan Stanley said in a June 25 report. In comparison, Alcoa produced 3.74 million tons of aluminum in 2012.

Alcoa has confirmed the shutdown of 149,000 tons of capacity so far in 2013, adding to the 531,000 tons temporarily and permanently closed last year. The company is doing more than most to help balance supply and demand, Davenport’s O’Carroll said.

“I bring a very strong bias for action to the job,” Wilt said. “I think that one of the reasons Klaus put me here is he expects fundamental and rapid change in primary because we can’t stand still.”

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