Earnings Cheer Aside, Alcoa's Outlook Looks Dim

Monday, Jul 12, 2010
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Any cheery notes in Alcoa's kickoff to earnings season Monday aren't likely to linger.


The battered aluminum maker is expected to show that second-quarter sales and profit improved compared with a year earlier. But any gains will come against a backdrop of reduced analyst expectations for the quarter.


Reasons for pessimism vary from low aluminum prices to slow growth in China to a tepid world economic climate. This reflects the reality that Alcoa still has big hurdles to clear and likely will face tough going for the rest of the year.


The biggest concern is the price of aluminum, which has fallen about 12% since the beginning of the year. Alcoa's profitability is tightly tied to the metal's price. There isn't much hope for a quick rebound as analysts expect prices to remain under pressure this year due to spotty demand globally for construction materials, cars, cans and appliances.


Making matters worse are still-high aluminum inventories on the London Metals Exchange, which at 4.4 million metric tons aren't far off a record of 4.6 million metric tons in late January. Not only can such inventory levels keep pressure on prices, but they also mean buyers will want to work through existing stocks before buying new material.


In light of this, Alcoa must become a cheaper producer, and fast. It is already behind competitors such as Russia's UC Rusal and global miner Rio Tinto in terms of productions costs.


Alcoa is trying to catch up with a project in the Brazilian Amazon and a joint venture in Saudi Arabia, both of which should lower costs in coming months. Alcoa Chief Executive Klaus Kleinfeld has also been on a cost-cutting drive, shutting plants, shedding 60,000 employees and selling noncore assets.


And some competitors may help Alcoa with their own moves to shore up the aluminum market. In China, the world's biggest producer of the metal, more than a dozen aluminum smelters are planning to idle about 700,000 metric tons of capacity because prices have been so low.


None of this may be enough to quickly lend a hand to Alcoa's beaten-down stock, though. For that, investors may have to wait for the relief that will only come from a more-certain economic rebound.

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