Low aluminum price seen hurting Alcoa profit

NEW YORK, Fri Jul 6, 2012 – Aircraft and automobile makers may be using more aluminum, but as long as the metal’s price remains near two-year lows, Alcoa Inc. will struggle, analysts said on Friday.
The average earnings estimate has been cut over the past week from 15 cents per share and Wall Street now expects Alcoa to post only a 5-cent per share second-quarter profit on Monday, according to Thomson Reuters I/B/E/S. That compares with 32 cents per share in the same quarter last year.
With an overhang of high inventories and a 20-percent drop in prices since March, many aluminum producers are losing money. Benchmark three-month London Metal Exchange aluminum stood at $1,903 a tonne on Friday – hovering above the $1,880 low of June 2010.
After a surprise profit in the first quarter, Alcoa’s Chief Executive Officer Klaus Kleinfeld painted a rosy picture of improving demand from the aerospace and auto industries, which are using more aluminum to reduce weight and improve fuel efficiency.
“Aerospace helps them, but it’s only 14 percent of their earnings,” said analyst Charles Bradford, of Bradford Research in New York. The auto market is an even smaller percentage of Alcoa’s business.
Alcoa’s core is its upstream business – mining bauxite, refining it to produce alumina, which is smelted into aluminum. And with raw material and power costs rising and aluminum prices depressed because of over-supply, Bradford saw little relief.
Tony Rizzuto, managing director of Dahlman Rose & Co, cut his second-quarter Alcoa estimate to 3 cents per share from 7 cents per share, citing the aluminum price.
“Although we continue to like the performance of the company’s downstream businesses, we expect the shares to remain pressured as long as LME aluminum prices remain at depressed levels,” he said.
Nomura analyst Curt Woodworth lowered his estimate from 5 cents per share to break-even on weaker aluminum prices. “The rise in aluminum physical premiums has helped to offset a fall in spot prices, but we feel it is likely a short-term phenomenon, given the overcapacity,” he said.