Alcoa Returns to Profitability and Growth in Third Quarter

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Commodities, Non-ferrous Metals

Business Wire released details of Alcoa’s third quarter operating results and though the numbers are fairly predictable they make cheery reading for the metals sector. On the back of rising primary aluminum ingot prices and cost cutting efforts Alcoa lifted both revenue and income across all segments with the exception of Engineered Products which includes Aerospace. Revenues for the third quarter were $4.6bn compared to $4.2bn in the second quarter, a 9% increase. By comparison, in 2008 third quarter revenues were 7.0bn but on higher ingot prices. Primary aluminum prices have risen from an average $1667 peer metric ton in the second quarter to $1972 per ton in the third.

Alumina production increased by 9% or 305,000 tons and average third party realized prices improved 13% as the primary ingot price rose. Third party sales are those to companies outside of the Alcoa group and prices are usually tied to a percentage of the LME ingot price.

Primary metal income also improved by $170m but still posted an $8m loss in the third quarter. Smelting capacity decreased by 25,000 metric tons but third party prices were up $305 per ton or 18%.

Flat rolled operating income improved by $45m over the second quarter but more due to cost savings than increased sales which were up only 7% from a low base. Shipments were up 6% suggesting sales prices barely lifted between the second and third quarters. Not surprisingly automotive made the biggest gains rising 21% from the second quarter on the back of the Cash for Clunkers programs both in the US and Europe. Aerospace flat rolled products was the only sector to decline.

Engineered products were 15% below the last quarter due to continued aerospace de-stocking, industrial gas turbine market declines and normal seasonal market impacts.

Alcoa has continued to cut costs and hoard cash while still moving forward with long term expansion plans in Brazil and China. The result has been the loss of 20,000 jobs, idling of high cost capacity and improved earnings in spite of currency exchange losses across pretty much all divisions. A weak dollar may be good for US based companies looking to export but for multi-national operators like Alcoa it often results in increased dollar operating costs for their overseas manufacturing bases tied to local power and raw material cost structures. Nevertheless Alcoa has done well in a market that is only just beginning to show signs of recovery to return themselves to profitability, but then after nearly 130 years in business they have learned how to weather a few recessions in their time.

–Stuart Burns

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