Tags: Alcoa | AA | metals | stocks

Alcoa Caught in Economic Crosswinds

By    |   Monday, 22 Aug 2011 11:45 AM

For Alcoa (AA), the nation’s largest aluminum producer, everything looked rosy after it reported in July that profit more than doubled in the second quarter, to $377 million from $170 million a year earlier.

At that point, Standard & Poor’s analyst Leo Larkin, who has a four-star buy rating on the stock, predicted that the company’s sales would increase 20 percent for the year as a whole, accelerating from the 14 percent increase in 2010. But Larkin’s forecast was based on an assumption of 2.6 percent growth for the U.S. economy this year and a buoyant expansion overseas.

Unfortunately for Alcoa, much has changed in the global economic outlook since then. The rebound in the United States, Europe, and Japan looks a lot more tenuous.

Annualized growth averaged only 0.9 percent in the United States for the first half of the year and the euro region’s paltry 0.2 percent GDP increase for the second quarter from the first was the lowest since the region emerged from recession in 2009. Larkin’s assumptions for U.S. and world growth look like a distant memory now.

China factor

To be sure, China’s economy remains buoyant, with a 9.5 percent annual expansion in the second quarter, but officials there expect it to slow to 9.2 percent in the current quarter. And many experts anticipate the rate will continue to decelerate as the government focuses on inflation.

China is the world’s No. 1 consumer of aluminum. Luckily for Alcoa, Chinese demand for aluminum hasn’t dropped yet. The country’s price for the metal recently hit a 15-month high. But that sparked fears China’s State Reserves Bureau will open aluminum stockpiles to push prices down as part of the inflation control effort.

Alcoa, to its credit, has increased its presence in developing markets over the past two years. Experts maintain that Chinese demand will remain strong, even in the face of an economic slowdown. Alcoa’s costs total about 25 percent less than its Chinese competitors, according to Morningstar research. Alcoa next reports around Oct. 11.

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For Alcoa (AA), the nation s largest aluminum producer, everything looked rosy after it reported in July that profit more than doubled in the second quarter, to $377 million from $170 million a year earlier. At that point, Standard Poor s analyst Leo Larkin, who has a...
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2011-45-22
Monday, 22 Aug 2011 11:45 AM
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