Alcoa to benefit from rising aluminum price

Analysts predict stronger quarterly earnings for the aluminum giant

CHICAGO (MarketWatch) — Rising aluminum prices and increased industrial demand will likely translate into stronger quarterly earnings for aluminum giant Alcoa Inc., which reports its first-quarter numbers on Monday to mark the unofficial start of corporate earnings season.

“The global demand for aluminum is getting better,” said Chicago-based Morningstar Inc. analyst Bridget Freas, who covers the aluminum and steel sectors. “Most people expect Alcoa’s earnings to be higher than last quarter.”

Analysts polled by FactSet expect the New York-based company to earn 27 cents a share on revenue of $6.14 billion, up from 10 cents a share on revenue of $4.89 million during the first quarter last year.

Alcoa /quotes/comstock/13*!aa/quotes/nls/aa (AA 18.14, +0.02, +0.11%)  has benefited two-fold, both from a run-up in aluminum prices over the past few months and from a steady increase in demand from the automotive and aerospace industries.

Since New Year, aluminum prices are up 7 cents to a current price of $1.20 a pound. Growing demand from emerging markets, led by China, has supported a rally in metal prices across the board in recent months.

But the uptick in aluminum prices takes a while to filter down to the bottom line and might be easier to see in Alcoa’s second-quarter report.

“There is a bit of a delay to translate into earnings, but it’s trending upwards,” Freas said.

Increased industrial demand

Analysts predict Alcoa will benefit most from a pick-up in sales of its flat-rolled products, which include aluminum plate, sheet and foil used in packaging in the consumer market, as well as in the transportation, building, construction and distribution markets.

Stronger industrial demand, which has been the main driver behind Alcoa’s downstream sales, is indicative of a generally healthier marketplace.

“The economic recovery is also playing a role,” said New York-based Credit Agricole Securities analyst David Lipschitz.

About 40% of aluminum consumption in the U.S. comes from the transportation sector, according to Freas, so any uptick in automotive demand would be a great benefit to the aluminum industry.

An improved housing market would also contribute to aluminum demand, but to a lesser extent.

“There’s not as much aluminum going into real estate as there is steel,” Freas said.

About 15% of aluminum consumption in the U.S. comes from the construction sector, which Freas said is fairly consistent with other developed economies such as Japan and Europe.

Supply tightening

Aluminum producers have struggled over the past year clearing out excess inventory, which is slowly being absorbed by rising demand.