Alcoa Profit Trails Estimates as Europe Trims Aluminum Orders

Alcoa Inc. (AA), the first company in the Dow Jones Industrial Average to report earnings this quarter, posted profit that trailed analysts’ estimates, saying European customers “dramatically” cut orders on economic uncertainty.

The largest U.S. aluminum producer’s third-quarter earnings, excluding restructuring costs and tax benefits, were about 14 cents a share. The average of 15 analyst estimates compiled by Bloomberg was for 22 cents. Chief Executive Officer Klaus Kleinfeld said yesterday European aluminum demand will decline 13 percent in the second half from the first.

Alcoa is grappling with rising production costs while the price of aluminum on the London Metal Exchange has fallen in the past two months. The company cut thousands of jobs and closed smelters after commodities plunged during the financial crisis in 2008. The New York-based company yesterday declined to forecast its fourth-quarter alumina and primary aluminum output.

“They are going through and trying to decide: Do they need to cut production somewhere and if so, when?” Lloyd O’Carroll, a Richmond, Virginia-based analyst at Davenport & Co., said in an interview. “If the LME pulls back enough, they will. I don’t know what their magic trigger number is, but I think there is one.” O’Carroll has a “buy” recommendation on Alcoa.

Net income rose to $172 million, or 15 cents a share, from $61 million, or 6 cents, a year earlier, Alcoa said. Sales increased 21 percent to $6.4 billion, beating the $6.23 average of nine analyst estimates.

Shares Drop

Alcoa dropped 2.4 percent to $10.05 in New York. The company fell 35 percent this year before today, the third-worst performer on the Dow after Bank of America Corp. and Hewlett- Packard Co.

“Fearful of a slowing economy, our European customers reduced their orders dramatically, even into September,” Chief Financial Officer Charles McLane said on an earnings conference call. That drove “a significant reduction” in profitability at the flat- and rolled-aluminum division, he said.

The three biggest euro-region economies will shrink 0.4 percent this quarter, the OECD said Sept. 8. European Union and International Monetary Fund officials are negotiating a 110 billion-euro ($151 billion) bailout. Alcoa received at least 24 percent of its 2010 revenue from European countries, according to company filings.

Rising Costs

The cost of goods sold -- excluding selling, general administrative and some other expenses -- increased 20 percent to $6.42 billion in the quarter, Alcoa said.

Primary aluminum production rose 8.2 percent to 964,000 metric tons while output of alumina, the raw material used to make the metal, gained 2.3 percent to 4.14 million tons. McLane said Alcoa is still evaluating fourth-quarter aluminum and alumina output ‘based on market conditions.’’

Aluminum for three-month delivery on the London Metal Exchange rose 0.8 percent to $2,248 a ton as of 6:59 p.m. local time. It has declined 9 percent this year.

Improved productivity boosted earnings by $60 million from the second quarter, even as lower metal prices and currency moves reduced income by a combined $116 million. Cost increases in materials, energy and repairs cut earnings by $103 million. Income after one-time items fell to $165 million in the third quarter from $364 million in the second.

Growth Forecast

Alcoa yesterday maintained its 2012 global demand growth forecast of 12 percent and said the pace of expansion will slow in the second half. The company also reiterated its forecast that demand will double by 2020.

“The slowing markets have not changed the underlying fundamentals,” Kleinfeld said on the call. “The fundamentals are the mega-trends, the mega-trends of growing population as well as urbanization.”

China, the world’s largest user of aluminum, will see demand rise 17 percent this year, Alcoa forecast yesterday, compared with a previous projection of 15 percent.

Alcoa is a fully integrated aluminum producer. It mines bauxite, an ore that contains aluminum, and refines it into alumina, the raw material used by aluminum smelters. As well as selling aluminum to industrial users, Alcoa makes products such as can sheet and components for cars and aircraft.

Alumina Dividends

Alumina Ltd. (AWC), Alcoa’s Melbourne-based partner in the world’s biggest producer of alumina, said yesterday it received $65 million in dividends from Alcoa World Alumina & Chemical. It fell 2.5 percent in Sydney.

Alcoa’s smelters will likely post a loss in the fourth quarter should spot aluminum prices average 99 cents a pound ($2,183 a ton) in the period, Brian Yu, an analyst at Citigroup Inc. in San Francisco, wrote in an Oct. 9 note.

Earnings were 66 cents in the second quarter of 2008, before the collapse of Lehman Brothers Holdings Inc. and the financial crisis sent commodity prices tumbling. They haven’t exceeded 32 cents since. The company posted three consecutive quarters of losses through June 2009. It has cut 20,080 jobs since June 2008, according to Bloomberg data.

In 2010, Alcoa permanently shut 295,000 tons of capacity at smelters in Maryland, North Carolina and Indiana.