NEW YORK, July 14 -- Cuts in global aluminum production, especially in China, should boost the metal's price and improve U.S. producer Alcoa Inc's (AA.N: Quote) earnings prospects, analysts said on Tuesday.
"We remain optimistic on the long-term fundamentals surrounding the aluminum market and believe that Alcoa is well-positioned to benefit from these trends," said analyst Tony Rizzuto of Dahlman Rose & Co.
Desjardins Securities' John Redstone said he saw "an improving aluminum market ... with the market experiencing a surplus this year and a deficit next year."
Their bullish comments came a day after Alcoa posted a second-quarter profit that beat Wall Street expectations and reported improving end-market demand for aluminum, even as the metal's price has slumped.
Over the past three months, the price of aluminum MAL3 has dropped sharply, from more than $2,400 per tonne in April to around $1,995 on Tuesday.
The price had been climbing steadily since the depths of the 2008 recession, but weak demand for cars, planes and construction and uncertainty over the strength of the global recovery have knocked it back.
Industry experts believe there is too much metal in the market now and that production cuts are necessary to bring the supply in line with demand and support the aluminum price.
Analyst David Lipschitz, of Credit Agricole Securities, believes overcapacity offsets Alcoa's recent improved productivity through cost cuts and headcount reductions.
"We believe the headwinds in the aluminum industry are still too strong to overcome," he wrote in a research note. "Until we see significant production cuts, we believe the aluminum price will remain under pressure."
Alcoa Chairman and Chief Executive Klaus Kleinfeld addressed that issue on Monday during a conference call with analysts in which he increased his estimate of 2010 global aluminum consumption growth from 10 percent to 12 percent.
"We've raised the demand projection, but at the same time we've seen that additional production came online so we continue to believe that we're going to have a surplus this year of roughly about 1.2 million tonnes," he said.
That did not include China, which he said has halved its surplus from 400,000 tonnes in the past month.
He said that at the depressed Shanghai pricing level, "roughly 6 million tonnes of aluminum capacity in China is below the water-line.
"We expect that very soon, most likely in the third quarter, we will see 1 million to 1.5 million tonnes coming offline."
Dahlman Rose's Rizzuto said such production cuts should benefit Alcoa, even though he expects third-quarter results to be hurt by seasonal slowdown and softer prices.
He said the company has the potential to generate $4.7 billion of EBITDA, or earnings before interest, taxes, depreciation and amortization. That "could equate to significant share price upside potential compared to where the shares are currently trading."
Curtis Woodworth, of Macquarie Research, said although aluminum prices have been weak, he expects China to act soon. "More will be cut than the 1.5 million tonnes forecast by Alcoa.
"Also, we expect an aluminum ETF (Exchange-traded fund) could be launched in the short run which would be another positive catalyst for aluminum," he wrote in a research note.
BMO Capital's Tony Robson said Alcoa could benefit from higher selling prices for alumina, the raw material for aluminum. Alcoa said as alumina sales contracts are renewed, it will offer customers index pricing rather than contracts based on a price linked to the London Metals Exchange.
Alcoa shares were up 21 cents or 1.93 percent at $11.08 on the New York Stock Exchange at midday on Tuesday.