Weak Aluminum Weighs On Alcoa

Despite the brief strengthening of aluminum in the second quarter, prices remain flimsy and demand from China 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 aluminum producer Alcoa, which is expected to post a third-straight quarterly loss when it reports second-quarter results on Wednesday. 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, is closely linked to the price of aluminum and has had to focus on aggressively reducing costs and streamlining its cost structure 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. 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 prices have risen nearly 8% since the beginning of the year, which analysts attributed to recent Chinese buying, which is likely to halt now that aluminum is more expensive. (See "Base Metals Go Back To Basics.") Shares of Alcoa were trading down by 7.3%, or 72 cents, at $9.14 during Monday's afternoon trading session. Analysts polled by Thomson Reuters expect the Pittsburgh-based company to report a second-quarter loss of 34 cents a share with sales of $3.9 billion. Investors will be interested in the metal producer's quarterly report for a gauge of how effective cost-savings initiatives have been and for any outlook-related guidance. source:www.forbes.com