The shiny side of Alcoa results

Business Spectator reported that almost lost in the tide of disappointment that followed the release of Alcoa’s first quarter earnings earlier this week was the news that China plans to put on hold all planned new aluminum smelters in an attempt to tackle over capacity and manage its energy consumption?

The disappointment in the Alcoa result was a lower than expected quarter on quarter 5% increase in revenue, even though the group’s bottom line number a profit from continuing operations of USD 317 million was better than anticipated.

Of greater longer term significance however both demand and prices for aluminum and alumina are continuing to increase with prices realized for the primary metal up 7% between the December and March quarters and alumina prices up 15%. Moreover, prices, particularly for alumina are steadily moving away from longer term contract pricing.

China’s plan which could affect USD 11 billion of planned investment in new capacity could be helpful to the fundamentals of the industry. China is already modestly short of domestic supply of aluminum and more materially short alumina and bauxite. Its existing industry is high cost and energy and emissions-intensive and China has been shutting down some of its existing capacity to try to meet energy savings targets.

Yet demand for the metal continues to rise. Alcoa is forecasting global growth in demand for aluminum of 13% this year with demand in China and India both growing at about 15%. Alcoa’s peer, Rusal is slightly more conservative. Late last month it forecast 12% growth in China’s aluminum consumption this year.

With LME aluminum inventories at relatively low levels and China apparently removing some of the supply side overhang, the fundamentals for a metal that has lagged the boom in other commodities are improving. That is good news not only for Alcoa and Rusal but Rio Tinto, where the massive bulking up of its exposure to aluminum with the ill fated acquisition of Alcan has remained a blot on its otherwise rapidly improving performance.

The efficiency of the big aluminum groups and the strong proportion of hydro generated power within their smelting portfolios also augers well. With China falling behind its own emission targets it is less likely to be tolerant of coal fired smelters operating at the top of the industry cost curve.

The shift towards market related pricing Alcoa says will take until at least 2015 to move its entire portfolio from contract to market related pricing is particularly pronounced in alumina, largely because China and other developing economies don’t have the integrated operations of the major producers and therefore have large and growing net short positions in alumina and bauxite.