Alcoa Says LME Acts As Natural Hedge

Alcoa Inc. (AA), one of the largest aluminum makers in the world, said that the company's strategy is to maintain exposure to fluctuations in aluminum prices on the London Metals Exchange and that it generally does not hedge foreign-exchange exposure.

"We don't take a position, except in very specific circumstances," Charles D. McLane Jr., Alcoa's chief financial officer since November 2006, said in an interview. "Our investors want us to be exposed to the LME."

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He said that the company analyzes its exposure to currencies and energy, and their correlation to movements in the price of aluminum. "Changes to currencies have a direct correlation to movement in the LME price and, as a result, act as a natural hedge," said McLane.

The London Metals Exchange is a main commodities exchange that deals in metals futures.

The aluminum maker, which has operations throughout South America, Russia, Australia, Africa, Europe, North America and Asia, says its takes into account London Metals Exchange prices, energy prices and its foreign currency exposure when it calculates its risk strategy.

"If we took any action, we would be increasing our overall risk," said McLane. "We don't sit around and guess where these currencies are going to go. If we were to hedge the cost components, we would need to hedge the revenue stream as well."

Aluminum sold on the London Metals Exchange is based in U.S. dollars. Selling aluminum through LME priced contracts, no matter where it is produced using local currencies, results in Alcoa's revenue being exposed to U.S. dollars. McLane said that "99.9%" of the company's revenue in its primary operations including alumina and primary ingot are in U.S. dollars.

McLane said that Alcoa continues to look to see whether any of those world's currencies are looking to break away from the pack.

McLane questioned the benefit of trying to hedge in the first place, saying that the benefit is limited and the risk is too great. "What is the purpose of actively hedging? We don't do it because, in my opinion, there is no long-term benefit." (The Wall Street Journal)