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Alcoa upbeat despite aluminium price fall

iconJul 9, 2015 09:57
Source:SMM
Alcoa, the aluminium group, has reported earnings below analysts’ expectations but taken an upbeat tone on the rest of the year.

July 8, 2015 10:09 pm

Ed Crooks in New York

Alcoa, the aluminium group, has reported earnings below analysts’ expectations but taken an upbeat tone on the rest of the year, opening a US corporate reporting season that is expected to show an increase in profits for most sectors.

Klaus Kleinfeld, Alcoa chief executive, said he still expected that 2015 “could be a decent year like the one we saw last year,” despite the uncertainty created by issues including Greece’s financial crisis, the turbulence in the Chinese stock market and conflict in Ukraine.

  

 

 The US market was growing more strongly than last year, if not quite as strongly as Alcoa had expected previously, while Europe was doing better than expected, he said.

China’s growth had shifted “from high to medium-high,” he added.

Alcoa is often seen as a bellwether for the world economy because of the use of aluminium in a wide range of industries from construction to consumer goods to aircraft.

The company reiterated its earlier forecast that the world market for aluminium would grow by 6.5 per cent this year.

It has become gloomier about some markets, such as global heavy truck demand, which has been hit by the slowdown in growth in Brazil and China. However, it still expects strong growth in other sectors, including aerospace and construction.

Alcoa’s broadly positive message is expected to be echoed by other US companies, which — excluding the energy sector — are forecast to show average year-on-year earnings growth of 1.9 per cent for the second quarter, according to John Butters of Factset.

Oil and gas companies, however, are expected to report sharp falls in profits as a result of the plunge in crude prices. Earnings are forecast to fall by 110 per cent for the small and midsized exploration and production companies, and by 55 per cent for the large international oil groups, Factset says.

Alcoa’s second-quarter earnings were hit by a fall in aluminium prices caused by a surge in exports from China. Underlying earnings per share of 19 cents, excluding one-off items, were 6 per cent higher than for the equivalent period of 2014, but analysts’ average forecast of 22.8 cents.

The shares — down 33 per cent for the year — fell 5.1 per cent to $10.50 ahead of the result, and were little changed in after-hours trading following the release.

Revenues were slightly stronger than expected at $5.9bn, up 1 per cent, compared with an average forecast of $5.8bn.

 Mr Kleinfeld said he considered it to have been a “strong quarter”, with record profits from alumina, the intermediate material used to make aluminium, and steady growth from specialised products and metals.

Alcoa has been using acquisitions and investments to reduce its reliance on volatile commodity prices by expanding those specialised “downstream” operations, serving industries such as cars and aircraft that have attractive long-term prospects.

It has also been making its commodity metals business more efficient, shutting high-cost capacity and starting a new joint venture in Saudi Arabia that benefits from cheap energy.

However, it still relies on primary aluminium production for about a quarter of its revenues. The rapid growth of Chinese exports had driven selling prices in the Midwest down 22 per cent from the start of the year to June 30, Alcoa said.

Mr Kleinfeld argued that the surge was the result of abuse of China’s system of export taxes and rebates, which was contrary to government policy and as a result was likely soon to be brought to an end.

Profits from Alcoa’s “upstream” commodity aluminium business fell to $67m after tax, down from $97m in the equivalent period of 2014.

That fall was offset by a more than fivefold increase to $215m in net income from alumina, described by Mr Kleinfeld as “our unsung hero”, where Alcoa has relatively low-cost capacity.

Profits from the specialised metals and components rose 4 per cent to $210m.

Read the full article on FT.com

 

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