Alcoa's Fate Sealed... In Aluminum

Company reports a third-straight quarterly loss on weak aluminum demand. Despite a modest rise in aluminum prices during the second quarter, demand for the metal remains weak and Alcoa reported its third-straight quarterly loss on Wednesday. Demand from China--which helped spur a rally that pushed aluminum prices up by roughly 9% during the quarter--is likely to thin as the country revs up its smelters, adding the additional threat of oversupply. None of these factors bode well for aluminum's pricing power in the near term, or for Alcoa ( AA - news - people ), which earned 35.9% of its 2008 sales from flat-rolled products and 30.1% from its primary metals business, according to Revere Data. The aluminum producer's performance is closely linked to the metal's strength, which is why the company has had to focus on aggressively reducing costs and streamlining as demand for aluminum buckled during the global economic crisis. The company's end-markets -- automotive, transportation, aerospace and building and construction -- have been some of the hardest hit, resulting in a 36% year-over-year sales decline in the first quarter. Although the company expressed optimism in April over government stimulus efforts to increase demand for building materials, recent reports that China is running its smelters at 2008 levels threatens to bog the market with oversupply until well into 2010. Late Wednesday, the company posted a second-quarter net loss of $454 million, or 47 cents a share, compared with earnings of $546 million, or 66 cents a share, a year ago. The loss from continuing operations was 32 cents a share and was 26 cents, excluding restructuring. Analysts polled by Thomson Reuters projected a loss of 38 cents a share. Quarterly sales were better-than-expected at $4.2 billion compared with analysts' estimates for sales of $3.9 billion, but fell 42% from last year's comparable period. The company attributed the sales slump to aluminum prices nearly halving year-over-year. Shares closed ahead of the quarterly release up by 5 cents, or 0.5%, at $9.46. Alcoa said it hit two-thirds of its savings target with $1.0 billion in procurement savings through the first half of the year and that its reduced cost base will help it withstand current industry weakness.Deutsche Bank analyst Michael Lewis said the Chinese capacity restarts are exacerbating oversupply issues in the aluminum market and although stimulus programs throughout the world are likely to improve demand for aluminum, supply continue to overshadow consumption through 2010. He forecasts a 1.75 Mt surplus in 2009 and 620 Kt surplus in 2010. "We believe global consumption is set to rebound in the beginning of 2010 as orders pick up, particularly for infrastructure projects linked to stimulus projects. We are also encouraged by the shift in global sentiment toward hybrid vehicles which will contain a relatively large amount of aluminum alloy," Lewis said. "However, unlike the other London Metal Exchange metals, we think price gains over the next two years will be limited given high global inventory levels." Aluminum companies saw mixed trading during on Wednesday, ahead of Alcoa's earnings with Kaiser Aluminum ( KALU - news - people ) down by 19 cents, or 0.6%, at $30.76. Century Aluminum ( CENX - news - people ) shed 22 cents, or 4.1%, to close at $5.21 and Aluminum Corp of China Limited ( AWC - news - people ) was down by 11 cents, or 2.7%, at $4.16. The PowerShares DB Base Metals Fund ( DBB - news - people ) closed down by 42 cents, or 2.8%, at $14.41. Thomson Reuters contributed to this article.