How Viable Is Alcoa's Aluminum Demand Forecast?

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Source: voyager-industries.com

Alcoa delivered a generally upbeat view of the aluminum market in 2013 during a conference call between the company’s chief executive Klaus Kleinfield and analysts following the release of the company’s fourth quarter results, reported the FT.

Alcoa is usually the first of the majors to release its figures, and because of its market and geographic spread, is often seen as a bellwether for US corporate (and the wider metals processing) industry.

Alcoa expects global aluminum demand to grow 7 percent this year, representing only a modest pick-up from last year’s rise of 6 percent and up just 0.5 percent from the firm’s third quarter revised forecast of 6.5 percent.

Breaking the results down in more detail, Alcoa has clearly benefited not just from cost-cutting and rationalization, but  the relative strength of finished products over primary.

After-tax operating income from the rolled products division rose 35 percent to $358 million for the year, and from engineered products it rose 14 percent to $612 million.

However, it was down 36 percent at $309 million for primary aluminum, the FT said, and by 85 percent to $90 million for alumina, illustrating the competition Alcoa is facing from low-cost Middle Eastern and Russian producers.

exact aluminum prices - MetalMiner IndXThe fall in the primary aluminum price alone wiped $1 billion from revenues this year.

Looking forward, Alcoa expects the strongest market growth to come in aerospace, with an increase of 9-10 percent, followed by building and construction, at 4-5 percent, and commercial transport at 2-7 percent, although no mention was reported of the dramatic fall in truck/trailer business the firm experienced in 2012.

Perversely Alcoa’s wheels business, which makes up over 80 percent of the commercial transport segment within its Engineered Products and Solutions group, continues to show strong growth, according to Reuters.

Just four months ago, Alcoa reported a revision in the firm’s demand for heavy trucks and trailers in China. At the start of the year, the company anticipated 3-8 percent growth. In the summer it revised that to a 3-8 percent decline only to reduce that further to a steep drop of 18-21 percent in October. But the fall in demand for heavy trucks, the FT says, is global.

Alcoa slashed its forecast for global demand to a 7-9 percent decline from 2-5 percent growth at the start of the year, cutting predictions for the US and Europe as well as in China. The wheels division, of course, supplies autos as well as trucks and car production, which at least in the US and China is picking up.

today's metal prices - MetalMiner IndXThe primary division is causing the most pain for Alcoa, in the face of lower aluminum prices.

Alcoa cut 240,000 tons per year of smelting capacity in Spain and Italy and permanently closed 291,000 tons of capacity in the United States in 2012. Reducing production costs is a must to remain competitive in a market that is seeing supply increase dramatically and with the average cost curve dropping as new production is started up in lower-power-cost locations.

Alcoa is responding gradually over a five-year period with a target of moving 10 percentage points down the global aluminum cost curve. The firm was at the 51st percentile in 2010, dropped by 4 percentage points in 2012 and is aiming to be at the 41st by 2015.

The omens so far for 2013 are better than for 2012, if not by much then at least by enough, to suggest Alcoa stands a good chance of achieving its 7 percent growth forecast.

Read about MetalMiner’s latest monthly aluminum price index reading.

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