Alcoa Sees `Headwinds' in Growth in China Aluminum Use as Car Demand Slows

Bloomberg Jan 11---Alcoa Inc. said growth in demand for aluminum in China, the world’s largest market for the metal, will decelerate as government measures to curb inflation slow housing and automobile sales.

China’s aluminum consumption will expand 15 percent in 2011 compared with 21 percent last year, the New York-based company said yesterday in its fourth-quarter earnings presentation. Metal used by truck makers will rise as much as 3 percent this year, compared with a jump of about 60 percent in 2010, Chief Executive Officer Klaus Kleinfeld said on a conference call.

“For 2011 we see some headwinds like the phasing out of the stimulus package, uncertain housing market,” the CEO of the world’s third-largest producer of the metal said.

China is trying to contain the effects of a lending boom unleashed in late 2008 with a $586 billion economic-stimulus package. The plan fueled a surge in home prices and investment in property, and quickened inflation.

“Construction is such a huge part of first-end use of aluminum in China, almost 50 percent,” Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., said by telephone from Melbourne today. “The measures that have been progressively ratcheted up to control speculation and other excesses within construction and high-end property would have inevitably been expected to be reflected in slower growth.”

Vehicle Sales

Shipments of aluminum used in autos may also slow after China raised the sales tax on small vehicles to 10 percent from 7.5 percent on Jan. 1 as it scales back measures to support auto sales. China’s vehicle sales growth will be about 10 percent to 15 percent this year, the China Association of Automobile Manufacturers said yesterday. Sales jumped 32 percent to 18.1 million units in 2010, according to the association.

China will use about 19 million metric tons of aluminum this year, Alcoa said. Europe, the second-biggest market, will consume about 6.9 million tons, the company said. Alcoa estimates global demand will expand 12 percent this year, compared with 13 percent in 2010. Use in Asia excluding China will increase 15 percent, from 10 percent last year, it said.

Alcoa said net income was $258 million, or 24 cents a share, in the fourth quarter after aluminum prices rebounded. That compared with a loss of $277 million, or 28 cents, a year earlier. Earnings excluding tax benefits and gains on restructuring and derivatives were 21 cents a share, beating the 19-cent average estimate of 15 analysts surveyed by Bloomberg.

‘Reasonably Strong’

Sales gained 4 percent to $5.65 billion, missing the $5.75 billion average estimate of seven analysts in a Bloomberg survey.

Alcoa fell 27 cents, or 1.6 percent, to $16.22 as of 10:17 a.m. in New York Stock Exchange composite trading. The shares were cut to “underperform” from “sector perform” by Fraser Phillips, an analyst with RBC Capital Markets in Toronto. Excess aluminum supply will curb the metal’s price and limit potential gains in Alcoa shares, he said today in a report.

“This is not a blow-it-out-of-the-park quarter,” Jorge Beristain, an analyst at Deutsche Bank AG in Greenwich, Connecticut, said by telephone. “It’s a reasonably strong quarter.”

The profit is Alcoa’s biggest since the third quarter of 2008, when commodities began to tumble after the bankruptcy of Lehman Brothers Holdings Inc. in September that year. Alcoa had net losses in 2008 and 2009, its worst run in at least 19 years. It fired more than 20,000 workers and closed plants in the U.S. and Europe during the global economic slowdown.

Aluminum Prices

Aluminum for delivery in three months on the London Metal Exchange averaged $2,365 a metric ton in the fourth quarter, the most since the third quarter of 2008. It traded at $2,541 on Jan. 7, the highest since Sept. 23, 2008, eight days after Lehman filed for bankruptcy. The metal advanced $3 to $2,485 at 3:17 p.m. in London.

“The increase in aluminum prices has more than offset high material and industry costs as well as the impact of a weaker U.S. dollar,” Chief Financial Officer Chuck McLane said on the conference call. “Each of our businesses was able to significantly improve their performance.”

Alcoa said demand strengthened in most of its markets and productivity gained. The cost of goods sold declined 7.5 percent from a year earlier to $4.54 billion.

The company said Jan. 7 it will resume idled production at three U.S. plants, adding 137,000 tons of output this year.

Currency Effects

Alcoa, which operates in 31 countries including Brazil, Australia and Canada, sells aluminum in dollars and pays costs in local currencies.

The Australian dollar appreciated 5.8 percent against the U.S. dollar in the fourth quarter, the Canadian dollar advanced 3.1 percent and the Brazilian real gained 1.6 percent. Crude oil prices on the New York Mercantile Exchange were on average 12 percent higher in the quarter compared with a year earlier.

Aluminum output in 2011 will be 43.2 million tons globally, exceeding consumption by 360,000 tons, according to Deutsche Bank estimates. There were 4.37 million tons of aluminum inventories stored in LME-monitored warehouses as of Jan. 7, down 5.3 percent from a year ago.