Looking purely at the aluminum price one might have expected Alcoa, Inc., to report a dire set of results in its latest second quarter earnings announcements but quite the contrary. While facing considerable “headwinds” according to Klaus Kleinfeld, the company’s chief executive, the firm has put out a decent set of results.
Further, while the aluminum price has continued to show ongoing weakness, he is quoted by an FT article as saying he still expected that 2015 “could be a decent year like the one we saw last year.”
Alcoa’s strategy of closing high-cost smelters, migrating to lower cost primary production in the Middle East, and diversifying into other alloys and downstream higher value-add products has clearly paid dividends for the New York-based multinational . Underlying earnings per share of 19 cents, excluding one-off items, were 6% higher than for the equivalent period of 2014, although analysts had optimistically forecast higher.
Diversification Paying Off
True, the share price is down 33% for the year, but for a business so exposed to the aluminum price, a quarter of Alcoa’s revenue comes from primary aluminum production most of which outside the Middle East must be close to loss making, and that is not unexpected.
Indeed, revenues —boosted by acquisitions and value-add investments — were slightly stronger than expected at $5.9 billion, up 1%, compared with an average forecast of $5.8 billion. Alcoa still made a profit from primary smelting overall. Its upstream activities made $67 million after taxes, down from $97 million for the same period in 2014. A strong performance from the alumina division added a further $215 million of net income compared to $210 million for the specialized metals and components business. Alcoa may be gradually exiting the smelter business, at least outside of it’s low-cost Middle East operations, but it’s not going to want to exit the stellar alumina business.
Looking forward, the firm sees good growth in the US market, with Europe gradually improving — assuming the Greek crisis continues to improve as expected now that a bailout deal is at hand. Slower growth in China and South America is still expected. Some markets, such as global heavy truck demand, are seen by the firm as likely to remain depressed but aerospace and construction are expected to continue to do well.
Although Alcoa operates in a highly dynamic cost environment, it continues to perform well despite an appalling primary metal price. Its strategy of downstream investment and alloy diversification is ensuring it remains a viable long-term business in spite of the current state of the market.