Alcoa lowers 2013 aluminium surplus forecast

Alcoa Inc., the largest US aluminium producer, has not changed its forecasted growth in demand in 2013 after reporting its first quarter earnings. That should be some comfort to investors in companies making non-ferrous metals, especially aluminium, as fears that the euro zone’s continuing problems and questions over China’s appetite for metals have gripped the market. Aluminium prices are down by 3.2% from a month ago. They have fallen by 10.9% since early-January.

This had an effect on Alcoa’s performance as well, particularly in its primary aluminium business. The company processes aluminium into value-added products and also sells alumina, an intermediate good. Its aluminium business’ Ebitda per tonne of metal produced declined by 4.2% on a sequential basis, but that of its value-added products and alumina business did well. Ebitda, or earnings before interest, taxes, depreciation and amortization, is a measure of profitability. As a result, the company’s adjusted Ebitda margin improved by 1.7 percentage points. But, dull demand meant sales declined by 1.1%.

Alcoa’s reading of its global end-user markets remains positive, with overall growth seen in key markets such as aerospace, automotive and can packaging, even though some regions may be experiencing some stress. Apart from focusing all its energies on driving up share of value-added products, the company has taken up cost and productivity improvements as another way of driving profitability.

Alcoa has retained its forecast of demand for aluminium to grow by 7% in 2013, but has changed its views on the demand-supply balance. It expects lower production due to slower capacity additions, which has lowered its forecasted aluminium surplus from 535,000 tonnes to 155,000. That should be good news for aluminium producers as a tighter market augurs well for prices. Inventories also continue to be stable. But a worry is emerging on the regional premiums front. Despite falling aluminium prices, rising regional premiums have helped producers. Recent months have seen these premium flatten, and if that continues and turn into a decline, it could become a worry.

What does this mean for Indian aluminium producers? Healthy regional premiums will protect them too from weak trends in aluminium’s market price. But a flat trend in the rupee to dollar average rate in the March quarter versus the December quarter means they will derive no benefit from currency depreciation. Signs of a recovery in domestic demand will be a positive, as will sustained appetite for the metal in China.

Rising freight costs could see some impact on performance though some relief on the coal cost front should be visible. Hindalco Industries Ltd’s overseas subsidiary, Novelis Inc., makes rolled aluminium products and should ideally enjoy the same benefits as Alcoa’s processed aluminium units. In the December quarter, however, its performance was affected by the implementation of an enterprise-wide software system. The March quarter was expected to see a better performance. If it does, it could provide a boost to Hindalco’s consolidated financial numbers.