Alcoa Inc., the largest U.S. aluminum producer, may report an 84 percent decline in second-quarter earnings as the eighth straight year of surplus global production drives down the price of the metal.
Profit excluding one-time items will be 5 cents a share, according to the average of 19 analysts’ estimates compiled by Bloomberg. Analysts have lowered their projections by 44 percent in the past 30 days as aluminum traded near a two-year low on the London Metal Exchange.
While its downstream fabricating business that supplies components to customers such as Ford Motor Co. and Boeing Co. is profitable, Alcoa’s aluminum-smelting unit is struggling because of lower metal prices. The New York-based company announced in January production-capacity cuts of 12 percent. The primary metals unit will post an $86 million after-tax operating loss, said Brian Yu, a Citigroup Inc. analyst.
“There’s not much they can do on the upstream,” Yu, who’s based in San Francisco and recommends holding the shares, said in an interview Friday. “The company continues to talk about their productivity gains, and I think it’s an important and notable effort on their side to lower cash cost, but not enough to offset the sharper drop in aluminum prices.”
Typically the first company in the Dow Jones Industrial Average to report earnings, Alcoa was scheduled to publish its results after the close of trading Monday. The company's shares have dropped 47 percent in the last 12 months, the worst performance on the index.
Worldwide aluminum production rose 4.1 percent to 14.9 million metric tons in the first four months of 2012, beating consumption by 623,703 tons, according to data compiled by Bloomberg. Output has exceeded usage each year since 2005, the data show.
Aluminum for delivery in three months on the London Metal Exchange averaged $2,019 a ton in the second quarter, 23 percent less than a year earlier.
To be sure, Alcoa is seeing rising demand from automakers, who are increasingly compelled by regulation to make lighter vehicles. Aircraft manufacturers face a record backlog as airlines hurry to refurbish aging fleets.
The U.S. aluminum industry will ship 16 percent more aluminum to automakers this year versus 2011 as car output climbs 11 percent, according to Lloyd O’Carroll, an analyst at Davenport & Co. in Richmond, Virginia. The average amount of the metal in each vehicle will rise 3 percent, he said in a June 26 note. Heavy-truck producers will buy 19 percent more aluminum and plane makers an extra 20 percent, he said.
Global aluminum use will rise 7 percent this year, Alcoa Chief Executive Officer Klaus Kleinfeld said during an April 10 conference call to discuss first-quarter earnings. His company is spending $300 million to expand auto-parts fabricating capacity at its Davenport plant in Iowa. Alcoa said in May it began a $90 million expansion of a plant in Lafayette, Indiana, to produce of aluminum-lithium alloys used in aircraft.
Libby Archell, an Alcoa spokeswoman, declined to comment.
“Have they done a good job with the downstream business? Yes,” David Lipschitz, an analyst with Credit Agricole Securities USA Inc. in New York, said in a July 3 interview. “The problem is you still have significant earnings from the upstream business. Until that changes, the story is still the aluminum price.”
Alcoa’s quarterly earnings haven’t recovered since commodity prices tumbled after Lehman Brothers Holdings Inc. filed for bankruptcy at the height of the financial crisis in September 2008. Alcoa has posted four quarterly per-share losses since then and hasn’t recorded net income of more than 32 cents a share.
The company’s competitors are also suffering from the decline in aluminum prices. Rio Tinto Group, the world’s second-largest producer, said today it reduced output by 15 percent at a smelter in New Zealand after prices fell.
Russia’s United Co. Rusal, the largest producer, saw first- quarter profit slump 90 percent. Oslo-based Norsk Hydro ASA, the fifth-biggest, also posted a 90 percent decline and said last month it would shut 120,000 tons of capacity at its Kurri Kurri smelter in Australia, citing weaker demand and oversupply.
Prices aren’t likely to rebound soon. Aluminum will average $2,188 a ton in the third quarter, according to the average of 21 analysts’ estimates compiled by Bloomberg. The fourth-quarter price will be $2,275, the data show.
Hanging over the market is 4.83 million tons of aluminum stored in warehouses tracked by the LME, equal to about 10 percent of global production. About 70 percent of the stockpiles are tied up in financing deals, making them unavailable for immediate delivery, according to Citigroup.
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