Alcoa Heads to Highest Profit in 2 Years as Aluminum Advances

Alcoa Inc., the largest U.S. aluminum producer, may post its highest earnings in nine quarters after the commodity’s price neared levels last seen before the bankruptcy of Lehman Brothers Holdings Inc. in 2008.

The company will report fourth-quarter net income of 19 cents a share after trading today, compared with a 28-cent loss a year earlier, according to the average of 15 analysts’ estimates in a Bloomberg survey. That would be the New York- based company’s biggest profit since the third quarter of 2008, when commodity prices began to tumble.

Alcoa, led by Chief Executive Officer Klaus Kleinfeld, had net losses in 2008 and 2009, Alcoa’s worst run in at least 19 years, firing more than 20,000 workers and closing plants in the U.S. and Europe during the global economic downturn. Aluminum demand rebounded 14 percent in 2010, the biggest increase since at least 1996, according to data compiled by Bloomberg.

“The measures the company has taken are really beginning to bear fruit,” Anthony Rizzuto, an analyst at Dahlman Rose & Co. in New York who rates Alcoa shares “hold,” said in an interview. “Alcoa is turning the corner here.”

Alcoa is traditionally the first company in the Dow Jones Industrial Average to post quarterly earnings. It rose 6 cents to $16.42 on the New York Stock Exchange on Jan. 7. The shares fell 4.5 percent in 2010.

United Co. Rusal, the largest aluminum maker, sold shares to the public and began trading in Hong Kong on Jan. 26, gaining 10 percent through 2010. Aluminum Corp. of China, the biggest Chinese producer, dropped 17 percent in Hong Kong last year.

‘Turnaround Story’

Aluminum for delivery in three months on the London Metal Exchange averaged $2,365 in the fourth quarter, the most since the third quarter of 2008. It traded at $2,541 on Jan. 7, the most since Sept. 23, 2008, eight days after Lehman filed for bankruptcy.

The fourth quarter “will actually deliver a glimpse of what they can start to on stable costs and rising aluminum,” said Jorge Beristain, an analyst at Deutsche Bank AG in Greenwich, Connecticut, who has a “buy” rating on Alcoa.

Mike Belwood, a spokesman for Alcoa, declined to comment.

Kleinfeld idled 20 percent of Alcoa’s smelting capacity after demand dropped and cut 25 percent of the workforce. Now he’s restarting output as demand grows. Alcoa said in a November investor presentation that usage will climb 13 percent in 2010. The company said Jan. 7 it will restore idled production at three U.S. plants, adding 137,000 tons of output this year.

“We are much leaner and streamlined,” after layoffs and shutting operations, Executive Vice President Helmut Wieser said at the presentation in New York. There is “more to come on the profitability side.”

Weaker Dollar

Alcoa operates in 31 countries including Brazil, Australia and Canada, selling aluminum in dollars and paying costs in local currencies. The Australian dollar appreciated 5.8 percent against the U.S. dollar in the quarter, the Canadian dollar advanced 3.1 percent and the Brazilian real gained 1.6 percent.

The currencies are “going against them,” Charles Bradford, a partner at Affiliated Research Group LLC, a New York-based consulting firm, said in an interview. “People who just look at the metal price have an incomplete answer.”

Earnings may also be constrained by caustic soda, which is used in the processing of bauxite, the ore used to make aluminum. Caustic soda in North America averaged $452 a ton in the fourth quarter, up from $380 in the third, Brian Yu, a San Francisco-based analyst for Citigroup Inc., said in a note last week. He downgraded the shares to “hold” from “buy.”

Aluminum Surplus

There isn’t a shortage of aluminum, with global output in 2011 of 43.2 million tons exceeding consumption by 360,000 tons, according to Deutsche Bank estimates. There were 4.27 million tons of aluminum inventories stored in LME-monitored warehouses as of Jan 7.

Some of that excess supply could be absorbed by the introduction of an aluminum exchange-traded product, supporting prices, Beristain said. London-based ETF Securities Ltd. said Dec. 7 it plans to introduce an ETP backed by aluminum in 2011, which would give investors exposure to the underlying commodity.

Beristain said the rally in copper, which traded at a record $9,754 a ton in London on Jan. 4, will make consumers start to think about switching to cheaper aluminum. Aluminum output may be reduced as China, the biggest producer, limits power supplies to users including smelters of the metal, Rizzuto said.

“China has gone from ‘grow at any cost’ to ‘grow at a reasonable cost and with some regard to pollution and environmental issues,’” John Stephenson, a fund manager at First Asset Investment Management Inc. in Toronto, said in an interview. That means there will be “less of a headwind for Alcoa going forward.”