Alcoa Inc. (AA) earnings estimates have plunged the most in three years as analysts’ expectations mount that the biggest U.S. aluminum producer may even record a fourth-quarter loss.
Net income will tumble 94 percent to 1 cent a share from 21 cents a year earlier, according to the average of 18 analysts’ estimates compiled by Bloomberg. That’s 82 percent less than the average projection from a month ago. Eight of the 11 estimates (AA) compiled within the last 28 days are for New York-based Alcoa to post a loss in the fourth quarter.
The average price of aluminum, which is used in beverage cans, aircraft and window frames, was 11 percent lower in the quarter from a year earlier after global growth decelerated amid a sovereign-debt crisis in Europe and government action to control inflation in China. Supply is exceeding demand and inventories have soared, leaving some smelters unprofitable at current metal prices.
“You have 40 to 50 percent of global capacity under water at these levels,” Kuni Chen, an analyst with CRT Capital Markets in Stamford, Connecticut, who has a “buy” rating on Alcoa, said in an interview.
Shares of Alcoa rose 2.4 percent to $9.45 yesterday in New York. The stock slumped 44 percent last year, the biggest decline on the Dow Jones Industrial Average (INDU) after Bank of America Corp.’s 58 percent drop. Alcoa, which is typically the first company in index to report earnings, is scheduled to publish its results after the close of trading on Jan. 9.
Commodities Drop
Mike Belwood, an Alcoa spokesman, declined to comment on earnings ahead of the announcement.
Net income of 1 cent a share would represent New York-based Alcoa’s worst quarter since the fourth quarter of 2009, when it posted a 22-cent loss.
The decline in the average of estimates for the fourth quarter of 2011 is the steepest since those made for the fourth quarter of 2008, according to data compiled by Bloomberg. Back then, the consensus view deteriorated to a 6-cent loss from a 7- cent profit 30 days earlier, after commodity prices tumbled amid a recession in the U.S. and Europe.
Aluminum for delivery in three months on the London Metal Exchange, the benchmark price on the world’s largest metals bourse, averaged $2,115 a metric ton in the fourth quarter. The metal traded at $1,956 on Dec. 14, a 17-month low and 30 percent less than the 2011 high of $2,803 on May 3.
‘Seen the Bottom’
Prices this year aren’t likely to retrace the decline seen in the second half of 2011, according to the average of 11 analysts’ price estimates. Aluminum will average $2,354 a ton in 2012, the data show.
“We’ve seen the bottom but it’s unclear exactly when it starts to go up meaningfully,” said Lloyd O’Carroll, an analyst at Davenport & Co., in Richmond, Virginia, who rates Alcoa a “buy.”
Global aluminum output exceeded demand by 953,516 tons in the first three quarters of 2011, according to data (.ALSURP) compiled by Bloomberg Industries. Inventories of the metal stored in warehouses monitored by major commodity exchanges rose 9.7 percent last year and stood at 5.19 million tons yesterday, the data show.
“Certainly by the middle of 2012 you’d see more supply come out” if prices stay at current levels, CRT’s Chen said.
“You have started to see production slowing in China in the last couple months,” he said. “That’s encouraging for the year ahead.”
Energy Costs
Energy costs at Chinese smelters are about $1,000 for each ton of aluminum produced, the highest in the world, Bloomberg Industries said in September. The cost of power represents about 30 percent of smelting costs, Bloomberg Industries analysts said in November.
The average price of crude oil futures rose 10 percent in the quarter compared with a year earlier. Other production costs also increased: Caustic soda (ICSDELMD), which is used to produce alumina from bauxite, jumped 11 percent on Nov. 25 from a year earlier, according to the most recent data from ICIS-LOR.
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 primary aluminum to industrial users, Alcoa makes products from the metal, such as can sheet and components for cars and aircraft.
Saudi Project
The company isn’t alone in feeling the pressure from lower prices and higher costs. Russia’s United Co. Rusal, the world’s biggest aluminum company, will post a 45 percent decline in fourth-quarter earnings, according to estimates compiled by Bloomberg.
Chief Executive Officer Klaus Kleinfeld in October forecast aluminum demand will double by 2020. The company is constructing a $10.8 billion mining, refining and rolling complex in Saudi Arabia with the Saudi Arabian Mining Co. to take advantage of cheaper electricity supplies derived from natural gas. The first commercial production is scheduled for next year.
“I think management is doing what they can to continue to move lower on the cost curve but obviously that takes longer,” Chen said.
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