Alcoa’s Results: Great Auto/Aero Strategy or Beneficiary of Lower Energy Prices?

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The market usually keenly awaits Alcoa’s results as the firm is seen as typical of US manufacturing firms and — I don’t like this phrase but for want of something better — a bellwether for US manufacturing.

Aluminum_Chart_January-2015_FNL

Certainly, Alcoa is involved in many different sectors of the economy but in recent years the firm focused on automotive and aerospace, two areas of significant growth, and less on areas such as construction that have, relatively speaking, been less buoyant. The strategy has been hugely successful, but it reduces Alcoa’s traditional credentials as a bellwether of US manufacturing. In another way, though, Alcoa’s recent results are typical of a wider development in the market.

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In a Reuters article the firm is reporting higher-than-expected quarterly profit, swinging from a year-earlier loss. Alcoa reported a net profit of $159 million versus a loss of $2.3 billion a year earlier. Excluding restructuring costs, Alcoa’s net profit was $432 million, not exactly stellar on a turnover of $6.4 billion but solidly in the black.

The report makes much of Alcoa’s successful investment in automotive and aerospace markets as the reasons for its success, but, interestingly, also credits lower energy costs and the stronger dollar as contributing factors. Factors that will be playing to the strengths of many US businesses consuming dollar-priced metals and either consuming energy in manufacturing or in distribution.

Energy costs and the dollar are now giving a significant boost to US manufacturing firms and should help them counter import competition from foreign competitors keen to take a piece of the only sizeable market showing robust growth this year. Arguably, though, US manufacturers edge on energy costs may be waning, at least in the short term as the oil price ,and with it wholesale natural gas prices and in time all energy prices, fall globally.

Last year the US enjoyed a shale gas and oil bonanza creating industrial activity and lowering costs, the competitive advantage to US firms was significant. This year, as the oil price falls globally, that advantage will be reduced relative to overseas competitors and may, if fracking activity declines as some expect, even lead to a level playing field. At least until some time after the oil price rises again and fracking firms begin to reinvest.

For Alcoa, the fruits of a sound investment strategy have undoubtedly been the primary reason for their turnaround in results, but the wider backdrop of lower energy prices last year and a gradually strengthening dollar have also made their contribution for the company. To what extent those will continue to prove beneficial in the year ahead, though, remains to be seen.

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