Alcoa sees higher alumina prices helping Q2 profit

Aluminum giant, Alcoa Inc (AA.N), which reported a first-quarter profit that beat estimates on Monday, benefited in part from higher alumina prices, as well as increased demand for flat-rolled products that is expected to continue into the second quarter.

Chief Financial Officer Chuck Lane told Wall Street analysts on a conference call that the quarterly increase in revenue came primarily from a 7 percent gain in alumina and a 17 percent rise in flat-rolled products.

Year-over-year results showed operating income for alumina jumped 97 percent and flat-rolled products by 170 percent, with higher demand in most end markets, and improved pricing and mix helping the segment.

Despite Alcoa's lower output of alumina, used in the production of aluminum metal, which dipped slightly in the first quarter to 4.0 million metric tons from 4.2 million in the fourth quarter of 2010, prices rose. [ID:nN1199754]

(For a graphic on Alcoa's earnings click on r.reuters.com/sub98r)

For alumina, which is made from raw material bauxite and refined into aluminum metal, Lane said prices for third-party transactions rose by 15 percent in the quarter.

Looking to the second quarter, the CFO said the company will increase alumina production by 125,000 tonnes, and higher pricing should continue to contribute to Alcoa's profits.

Chairman and Chief Executive Officer Klaus Kleinfeld emphasized several times on the call that Alcoa's goal to continue switching its pricing method for its alumina contracts to an index based on the spot market was on target.

He said 20 percent of its alumina business was already being conducted either through contracts priced against a spot index or in the spot market itself.

For over two decades, third party or independent aluminum smelters generally bought their alumina supplies through multi-year contracts with the price set as a percentage of the London Metal Exchange aluminum metal price.

But last year, lead by Alcoa -- the world's largest alumina producer -- long-term contracts for the material have moved to using a spot market index as its basis.

Kleinfeld said it still aims to have all of its contracts switched to a spot index pricing by 2015, with about 20 percent of the contracts coming due each year.

"We are not concluding any alumina contracts that are not based on either the index or spot. We have traditionally always kept a bit of our volume in the spot market and we will continue to do that," the CEO said, in answer to a question.

He added that Alcoa does not mind if its spot business increases somewhat as a result, "because it comes down to more frequent pricing."

As long as the alumina price continues to rise that helps Alcoa's bottom line.