Pittsburgh: Alcoa Inc., the world’s third-largest aluminum producer, on Tuesday reported a 52% drop in third quarter profit and said it would conserve cash by suspending its stock buyback program and all non-critical capital projects.
Alcoa, the first component of the Dow Jones industrial average to report third-quarter earnings, said results were hurt by sharply lower aluminum prices, weaker demand and a charge from curtailing production at a Texas smelter.
As a global economic slowdown crimps demand for virtually every commodity, aluminum prices have dropped 32% from an all-time high of about $3,380 per metric ton on 11 July. Copper, lead, nickel and other metals have also tumbled.
Other companies facing the difficult market conditions include Moscow-based Rusal, the world’s top aluminum producer, and Rio Tinto Ltd., the mining giant, which acquired Canada-based Alcan Inc. last year.
Alcoa, which manufactures aluminum and uses it to make everything from truck wheels to jet wing parts, posted earnings of $268 million, or 33 cents per share, for the three months ended 30 September.
That compared with $555 million, or 63 cents per share, during the same period last year, when results included a net gain of 25 cents per share for Alcoa’s sale of its stake in Aluminum Corporation of China Ltd., also known as Chalco.
The latest quarter included a charge of 4 cents per share for the smelter curtailment in Rockdale, Texas, which involved about 660 layoffs. The charge was previously announced.
It also included a negative currency impact of 6 cents per share on a sequential basis, tied partly to inter-company loans between facilities in the U.S. and Brazil.
Shares of Alcoa fell 51 cents, or 3%, to $16.20 in after-hours trading. During the third quarter, they slid 34%.
Revenue edged down 2% to $7.23 billion from $7.39 billion in the third quarter of 2007.
Analysts polled by Thomson Financial, on average, expected profit of 50 cents per share on revenue of $7.23 billion. Those estimates typically exclude one-time items.
Klaus Kleinfeld, Alcoa’s president and chief executive, said profits were squeezed as aluminum prices and demand declined and costs rose. The company would conserve cash by suspending its stock buyback program and non-critical capital projects, he said.
“We will continue to manage for the downturn and take aggressive action to be well-positioned when the market recovers,” he said in a conference call with analysts and reporters.
The tighter margins will have a greater impact going forward, though they will be somewhat mitigated by the easing of energy prices and a stronger U.S. dollar, he said.
Alcoa’s suspension of its share buyback program and non-critical capital projects were actions taken “to conserve cash and maximize profitability through very adverse economic conditions.”
With the sharp decline in metal prices and increasingly soft demand in key markets, Kleinfeld said Alcoa is making targeted reductions and is adjusting manufacturing capacity to meet demand in rapidly changing markets.
He said Alcoa was looking at “a host of different options to try to lower our overall costs,” but he declined to specify which capital projects might be suspended.
Alcoa expects all of its North American markets to decline this year compared with last year, Kleinfeld said, citing a 14% annual decline in auto production and weakness in the U.S. heavy truck and trailer market.
China’s aluminum demand is forecast to grow about 15% this year, down from a previous forecast of 22%, Kleinfeld said. Brazil, the rest of Asia and countries in Eastern Europe will continue to grow, but they are not significant enough to offset declines in the U.S. and in other European countries, he added.
“All in all, we project 6% global growth for this year, down 2 percentage points from our previous projections,” he said.
In July, Alcoa announced plans to cut more than 1,200 jobs in Mexico and Honduras because of weak demand from the North American auto market.
Morgan Stanley analyst Mark Liinamaa, citing deteriorating market conditions, forecast lower aluminum prices and cut Alcoa’s earnings estimates before the company reported Tuesday.
“Slowing global growth, risks with the financial crisis and rising aluminum stocks are weighing on aluminum fundamentals,” he wrote in a note to investors.