Alcoa Sees Almost Decade-Long Aluminum Surplus Ending

Alcoa Inc. forecast global aluminum demand will exceed production this year, predicting an end to an almost decade-long surplus driven by Chinese output that has saddled the industry with lower prices.

Alcoa is among aluminum producers outside of China to have shuttered unprofitable smelters amid a glut of the lightweight metal. The New York-based company yesterday reported better-than-expected first quarter earnings and said it now sees a global supply deficit of 730,000 metric tons. In January it had predicted a 106,000-ton surplus.

There have been nine years of excess global production, according to data compiled by Bloomberg, with Chinese output tripling in the period. Aluminum futures slumped in February to the lowest in more than four years.

Depressed aluminum prices have spurred Alcoa Chairman and Chief Executive Officer Klaus Kleinfeld to seek 800,000 tons of smelting cuts and to focus more on the company’s profitable downstream operations that serve auto and aerospace customers. Other aluminum producers are also suffering: Russia’s United Co. Rusal last month posted a $3.2 billion loss for 2013 while Rio Tinto Group took a $1.3 billion writedown on its aluminum business.

“We want to make sure that we grow our value-add businesses and at the same time costs come down on our commodity side so that we become less dependent on factors that we can’t control,” Kleinfeld said yesterday in an interview.

Smelting Loss

Alcoa, the largest U.S. aluminum producer and the first company in the Standard & Poor’s 500 Index to report quarterly earnings, was removed from the Dow Jones Industrial Average in September after 44 years. The shares advanced 4.5 percent to $13.09 at 9:31 a.m. in New York.

Alcoa’s profit, excluding restructuring costs and other one-time items, was 9 cents a share, it said in a statement, beating the 5-cent average of 18 analysts’ estimates compiled by Bloomberg.

Aluminum futures on the London Metal Exchange averaged $1,754 a metric ton in January through March, the lowest quarterly average since 2009. Metal for delivery in three months on the LME rose 0.2 percent to $1,822.50 today.

Demand from U.S. automakers helped offset the slump in prices. Earnings from Alcoa’s rolled-products unit, which supplies carmakers, surpassed its January forecast. In contrast, the smelting division posted an after-tax loss of $15 million.

Overall, Alcoa had a net loss of 16 cents a share compared with a net income of 13 cents a year earlier. Sales fell to $5.45 billion, trailing the $5.55 billion average estimate.

Higher Premiums

Softening the impact of lower prices was a 66 percent increase in U.S. premiums, the surcharge that aluminum consumers must pay on top of the LME price to take delivery of aluminum from LME-registered warehouses. Higher premiums mean Alcoa gets a better overall price for its commodity aluminum sales.

Premiums rose along with delays to the deliveries. The warehouse bottleneck has been a source of controversy in the $90 billion-a-year aluminum industry, with Alcoa complaining that the holdups are reducing market transparency. The LME’s proposed rule change to speed up deliveries was delayed last month after a U.K. judge said the bourse’s consultation was flawed.

Alcoa yesterday maintained its forecast for worldwide aluminum demand to grow 7 percent this year. It boosted its projection for aerospace growth to as much as 9 percent, citing demand for large commercial aircraft and regional jets.

Kleinfeld told analysts on a conference call that Alcoa’s sales of auto sheet will rise to $1.3 billion in 2018 from $330 million this year. He sees demand growth driven by developments such as Ford Motor Co.’s new lightweight aluminum-bodied F-150 pickup truck.

“The opportunity in auto is tremendous,” Kleinfeld said in the interview. “This is just the start of the light-weighting story.”

(Updates share price in sixth paragraph.)
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